ABSTRACT
Introduction This chapter presents an integrated Keynesian monetary model for a small open economy. Our aim is to investigate the quantitative implications of alternative policy rules for the stability properties of such economies. As pointed out by McCallum (1999), there is no consensus on the target variables that should characterize the feedback policy rule of the central bank. In this chapter we specifically seek to investigate the stability properties of policy rules that react to exchange rate and stock price fluctuations, and to investigate the impact of stronger reaction by the central bank to inflation and capacity utilization gaps.
