Monetary policy of a small open economy in the world production chain

In the world production chain there is a small economy that outsources production to its upstream, sells intermediate goods to its downstream and consumes imported final goods. It is shown that in responding to shocks from demand for intermediate goods, from the wage rate in the upstream and from the currency exchange rate between the upstream and downstream countries, the monetary policy of the small country is insignificant in the sense that any attempt of changing its monetary stance to raise national welfare will be offset by the movements of exchange rates. (C) 2012 Elsevier B.V. All rights reserved.