Description

This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We so lve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a versi on of the model calibrated to the Chilean economy. The contributions of the paper are twofold. Firs t, under the optimal policy the volatility of non- tradable inflation is near zero. Second, stabilizing non-tradable inflation is optimal regardless of the financial structure of the small open economy. Ev en for a moderate degree of price stickiness, implementing a monetary policy that mitigates asset market segmentation is highly distortionary. This last result suggests that policymakers should resort to other instruments in order to correct financial imperfections.