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This paper is to examine how important an improvement in global monetary policy might be for the macroeconomic performance of a small open economy such as the United Kingdom. The paper contributes to the literature by proposing a new methodology to treat indeterminate solutions, and by analyzing a policy improvement within a three-country framework. Both contributions yield a rich set of theoretical and policy implications. The authors find that the performance of the domestic macro economy depends crucially on domestic monetary policy, but there remains significant potential for monetary policy abroad to improve the stability of inflation and output in a small open economy.
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