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Instrument rules in monetary policy under heterogeneity in currency trade

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Bask, Mikael

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Abstract

We embed different instrument rules into Galí and Monacelli's new Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, conditions for a determinate and least squares learnable REE are in focus. When a contemporaneous data specification of the rule is used in policy-making, the degree of trend following in currency trade does not affect these conditions, except in case of an extensive use of trend following, whereas a forward expectations specification makes it less likely to have a determinate and learnable REE when the degree of trend following is increasing. We allow for interest rate inertia in the analysis.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 61 (2009)
Issue (Month): 2 ()
Pages: 97-111
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Handle: RePEc:eee:jebusi:v:61:y:2009:i:2:p:97-111

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Keywords: Determinacy DSGE model Interest rate rule Least squares learning Technical trading;

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References listed on IDEAS
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jokivuolle, Esa & Kilponen , Juha & Kuusi, Tero, 2007. "GDP at risk in a DSGE model: an application to banking sector stress testing," Research Discussion Papers 26/2007, Bank of Finland. [Downloadable!]
  2. Bask, Mikael, 2007. "Long swings and chaos in the exchange rate in a DSGE model with a Taylor rule," Research Discussion Papers 19/2007, Bank of Finland. [Downloadable!]
  3. Laakkonen, Helinä, 2007. "Exchange rate volatility, macro announcements and the choice of intraday seasonality filtering method," Research Discussion Papers 23/2007, Bank of Finland. [Downloadable!]
  4. Tervala, Juha, 2007. "The international transmission of monetary policy in a dollar pricing model," Research Discussion Papers 29/2007, Bank of Finland. [Downloadable!]
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