Discretion versus rules in a small open economy (Turkey)

My thesis research examines theoretical issues related to an optimal monetary policy for a small open economy. It is composed by three chapters, which make use of a New-Keynesian model for a small open economy featuring nominal rigidities, monopolistic competition, and complete financial markets.; The first paper, 'The Target of Inflation for a Small Open Economy', discusses the features of equilibrium under discretion in open economy models where the central bank can target any convex combination of domestic and foreign prices. I demonstrate that to achieve equilibrium determinacy it does not matter what price index is chosen by the central bank, as long as it is not PPI index. Many recent papers recommend to move away from domestic price stability using a welfare argument. My work confirms this idea, but on the grounds of equilibrium determinacy.; My paper with Francesco Zanetti is 'The Advantage of Tying One s Hand. Revisited'. We compare the impact on welfare of discretionary policies with monetary regimes that are committed to fixing the exchange rate. We argue that, contrary to common wisdom, the time-consistent monetary policy leads to a lower loss than the policy that ties the central bank s hands by stabilizing the price of the foreign currency. However, the strategy that fixes the exchange rate is the best when the central bank aims at maximizing welfare in the economy.; My third paper, 'With or Without E.U.: Memberships to Monetary Unions. The case of Turkey' is written with Can Erbil. We discuss the impact on domestic well being of the discretionary policy that will allow Turkey to eventually become part of the European Monetary Union. We implement a maximum-likelihood routine to estimate the parameters of Turkey.