Announced Regime Switch: Optimal Policy For Transition Period

The novelty of this paper is the presentation of the theoretical framework that allows to model announced change of the monetary regime. The author analyzes behavior of small open economy that announced to adopt a monetary policy regime with focus on offsetting nominal exchange rate changes in given number of periods. First, the author analyzes effects for macroeconomic stability of choice of the monetary regime for transition period. For this analysis, the author considers representative types of monetary regimes in the announcement-change period. The author also tries to rank the examined regimes in terms of loss functions. Moreover, the author tries to analyze the evolution of business cycles synchronization over the transition.