OPTIMAL MONETARY POLICY AND THE EXTERNAL VARIABLES: EVIDENCE FROM ASEAN-3
The aim of this paper is to determine the optimal monetary policy rule for small open economies. The rationale behind is that the monetary policy is concerned not only in the output gap and the inflation, but also in the external variables constituting the ground for the analysis. The method is based on Svensson (2000). Further, the paper intends to Explore the value of the loss function of the central bank. Using data from ASEAN-3, namely Indonesia, Malaysia and Thailand, the empirical results indicate that (1) the countries do care about the inflation and the output gap. This finding is in accordance with the central banks’ objective that price stability is the most important objective
of the monetary policy, (2) the exchange rates and terms of trade have impact on the central banks action (3) the specified instrument policy rule have to be considered as optimal in general. Indonesia and Thailand have comparatively smaller value of loss than Malaysia, which could be explained by the central banks of Indonesia and
Thailand have been introduced the inflation targeting in 2000, except for Malaysia.
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