Unemployment, Trade Openness and Optimal Monetary Policy.

This paper studies how the monetary policymaker should conduct the monetary policy in a small open economy with labor market frictions. The welfare loss function shows that the monetary policymaker faces a stabilization trade-off between the PPI ination and the unemployment rate gap. We find that the welfare gains from implementing the optimal monetary policy are small relative to the optimized simple rule. In addition, when conducting the optimized simple rule, the monetary policymaker should attach a greater weight to the unemployment rate gap when the economy is more open. [ABSTRACT FROM AUTHOR]