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Exchange Rate Management and Inflation Targeting: Modeling the Exchange Rate in Reduced-Form New Keynesian Models

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Abstract

This paper introduces a strategy for modeling the exchange rate when the monetary authority targets inflation while also managing the exchange rate using interventions. It does so in the framework of a standard reduced-form New Keynesian model of monetary transmission used in many institutions for research, forecasting, and monetary policy analysis. We propose a microfounded modification to the UIP condition which allows for modeling of informal exchange rate bands. Our modeling strategy is useful for most hybrid IT regimes, including those with imperfect control over market interest rates.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 58 (2008)
Issue (Month): 03-04 (May)
Pages: 166-194

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Handle: RePEc:fau:fauart:v:58:y:2008:i:3-4:p:166-194

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Keywords: IT regimes; New Keynesian model; exchange rate; UIP;

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Cited by:
  1. Patrick Blagrave & Peter Elliott & Roberto Garcia-Saltos & Douglas Hostland & Douglas Laxton & Fan Zhang, 2013. "Adding China to the Global Projection Model," IMF Working Papers 13/256, International Monetary Fund.
  2. Jaromir Benes & Andrew Berg & Rafael A Portillo & David Vavra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 13/11, International Monetary Fund.
  3. Juraj Antal & Frantisek Brazdik & Jan Bruha & Martin Fukac & Adrian Pagan & Jiri Podpiera & Stanislav Polak & Yuliya Rychalovska, 2008. "CNB Economic Research Bulletin: Inflation Targeting and DSGE Models," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 6, number rb06/2 edited by Juraj Antal & Jan Babecky, August.
  4. Josef Arlt & Martin Mandel, 2012. "Is it Possible to Predict the CNB Repo Rate on the Basis of the Backward-Looking Monetary Rule?," Politická ekonomie, University of Economics, Prague, vol. 2012(4), pages 484-504.
  5. Ion PARTACHI & Simion MIJA, 2013. "Monetary Policy Transmission Mechanism Using Econometric Models," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 61(4), pages 148-157, December.
  6. Ales Bulir & Jaromír Hurník & Katerina Smidkova, 2014. "Inflation Reports and Models: How Well Do Central Banks Really Write?," IMF Working Papers 14/91, International Monetary Fund.

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