The optimal rate of monetary growth in an open economy : the optimal crawl revisited

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This paper analyses the optimal monetary growth rate in a small open economy under two extreme assumptions about capital mobility. It shows that if capital is perfectly mobile internationally, then in general the optimal monetary growth rate is time inconsistent. Two exceptions to this arise, and in both cases no unique optimal monetary growth rate exists. The optimal rate of monetary growth across steady states is also considered and again no unique optimum exists. In the other extreme, where capital is perfectly immobile, there is no problem of time inconsistency. In this ease an optimal rate of monetary growth exists and leads to a ‘ distorted ’ Friedman rule, similar to that obtained for a closed economy