External shocks in a small open economy: an evaluation of monetary policy rules

Abstract

This paper evaluates several small open economy DSGE models and the impact of external shock spillovers on small open economies. We investigate five small economies (the UK, Australia, Canada, New Zealand and Taiwan) and find that the welfare consequences vary depending on key domestic economic variables, and the best interest-rate rule varies across models. Then we examine the performances of the four types of models, a preferred result has been found in a model which considers the country risk premium, as the best rule could be obtained as long as the selected parameters are calibrated for particular economies.