This paper solves for optimal policy rules in a stylized small open economy model under a spectrum of targeting regimes. These policy reaction functions are presented as feedback rules highlighting the dominant state variables in each rule. Optimal simple rules – rules that exploit a reduced information set – are explored to assess how much is lost when information is excluded from the optimal state-contingent rule. For the model analyzed we find that some optimal simple rules can approximate reasonably well the optimal state-contingent rule, these simple rules contain the real exchange rate. Knowing which variables underpin the performance of the optimal state-contingent rule is important for developing simple, robust, rules with good stabilizing properties.
Dennis, Richard. 2000. “Optimal Simple Targeting Rules for Small Open Economies,” Federal Reserve Bank of San Francisco Working Paper 2000-20. Available at https://doi.org/10.24148/wp2000-20