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  • P-ISSN 1738-656X
  • E-ISSN 2586-4130

한국개발연구. Vol. 36, No. 1, March 2014, pp. 81-106

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Monetary Policy in Open versus Closed Economies in the Presence of Distortions: ASimple Transformation and Its Applications

Kyu-Chul Jung

Author & Article History

Manuscript received 13 September 2013; revision received 16 September 2013; accepted 09 December 2013.


This paper compares the monetary policy problem in open economies with that in closed economies. It is found that the monetary policy problems in open and closed economies are isomorphic even in the presence of distortions in a steady state and hence the optimal monetary policies have similar properties. On the other hand, the monetary policy maker in open economies has a distorted incentive to manipulate the terms-of-trade. Because of the additional distortion in open economies, there exist gains from international monetary policy cooperation even in the case of a unit intertemporal elasticity of substitution, in contrast to the literature that abstracts from distortions in a steady state. Also, it is found that in the presence of distortions inflation bias is decreasing in openness, which is line with empirical evidence. In addition, this paper presents a simple transformation so that methods in closedeconomy models are easily applicable to open-economy models.


Monetary Policy(통화정책), Isomorphism(같은꼴 사상), Distortion(왜곡), Inflation Bias(인플레이션 편의), International Cooperation(국제협력)

JEL Code

E52, E61, F42

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