Should the ECB respond to exchange rates?
AbstractUsing a structural, quantitative macro model, this paper investigates benefits of including the real exchange rate of the euro into the monetary policy rule of the European Central Bank (ECB). The problem is considered from viewpoints of both the whole monetary union and a single member state with a national economy more open and facing different structural shocks than the union economy on average. According to the results, the union would benefit more from the exchange rate stabilisation than the member state, when the exchange rate response is set to minimise the loss function calculated for the whole monetary union. Only with rather high exchange rate response by the central bank, would the gain for the member state be larger. Moreover, also when it comes to central bankʼs responses to inflation and output, the common monetary policy does not fit the member state very well. The union as a whole would benefit from central bankʼs relatively stronger response to output than inflation, while for the member state the weights of inflation and output in the policy rule should be set the other way round.
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Bibliographic InfoArticle provided by Finnish Economic Association in its journal Finnish Economic Papers.
Volume (Year): 18 (2005)
Issue (Month): 1 (Spring)
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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.:
- Laurence M. Ball, 1999.
"Policy Rules for Open Economies,"
in: Monetary Policy Rules, pages 127-156
National Bureau of Economic Research, Inc.
- Nicoletta Batini & Andrew G Haldane, 1999.
"Forward-looking rules for monetary policy,"
Bank of England working papers
91, Bank of England.
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