3

This paper analyses the optimal monetary policy under incomplete pass-through and asymmetrical price rigidity. In a general equilibrium sticky price model of a small open economy we find that the optimal interest rate rule is to respond to real exchange rate shocks, reducing pass-through. Moreover, the extent of the optimal intervention depends positively on the degree of pass-through and negatively on price rigidity. Therefore, monetary policy should adjust more in the case of depreciation of the domestic currency than in the case of its appreciation due to higher downward price rigidity and lower downward pass-through. We use this prediction to evaluate the monetary policy of the Central Bank of Russia. We find that the present policy is too inflationary and suggest that less effort should be made to prevent nominal appreciation of the Rouble.JEL: E12, E31, E52, F41