Essays on the Optimal Monetary Policy in Small Open Economies

Abstract

In the first chapter of this thesis, I analyze the optimal policy problem in a canonical DSGE model with an enforcement constraint, where the enforcement constraint takes the form of an inequality for value functions. The main result in this chapter is that there is an equivalence relation in the presence of enforcement constraint between the original non-linear optimal policy problem and LQ approximate optimal policy problem. In the second chapter of this thesis, I continue to analyze the optimal policy problem on the basis of a small-open New Keyensian DSGE model where limited enforcement and limited spanning interact to create an endogenous debt limit. If there are fiscal policy measures to eliminate steady-state distortions in the case of complete international financial markets, then enforcement constraint has no role in the determination of the inflation of GDP deflator, real exchange rate, consumption, and the number of hours worked in each period. In the third chapter, I show that the equivalence relation holds in the small-open New Keyensian DSGE model with limited enforcement and limited spanning.