Central bank learning and Taylor rules with sticky import prices

Abstract

This paper examines the outcomes of alternative policy targets for monetary policy in an open economy subject to terms of trade shocks and with less-than-perfect exchange-rate pass through. The central bank also learns the evolution of inflation and output growth in the design of its policy rules. We show that a Taylor rule for the interest rate, based on inflation and output gap targets, when terms of trade shocks are positive, yields more beneficial welfare distributions than comparable feedback rules based only on an inflation target. © Springer Science+Business Media, Inc. 2006.