Article Review of Monetary Policy and Welfare in a Small Open Economy

Abstract

The main objective of the paper authorized by Bianca De Paoli under the title of “Monetary Policy and Welfare in Small Open Economy” is to scrutinize the optimal monetary policy in the context of a small open economy under monopolistic competition and nominal rigidities. By focusing on the research question of whether there is a role played by the central bank to stabilize international prices in open economies or it should solely aim to prevent fluctuations in domestic inflation and output, the author found out that utility-oriented loss function can be elaborated as a quadratic function of domestic inflation, output gap, and real exchange rate. In this brief article review, I analyzed the methodology, main deviations or modifications of the model, role of monetary policy, contributions of the study.