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Simple monetary policy rules and exchange rate uncertainty

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Author Info
Kai Leitemo
Ulf Soderstrom

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Abstract

We analyze the performance and robustness of some common simple rules for monetary policy in a new-Keynesian open economy model under different assumptions about the determination of the exchange rate. Adding the exchange rate to an optimized Taylor rule gives only slight improvements in terms of the volatility of important variables in the economy. Furthermore, although the rules including the exchange rate (and in particular, the real exchange rate) perform slightly better than the Taylor rule on average, they sometimes lead to very poor outcomes. Thus, the Taylor rule seems more robust to model uncertainty in the open economy.

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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2001)
Issue (Month): Mar ()
Pages:
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Handle: RePEc:fip:fedfpr:y:2001:i:mar:x:2

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Keywords: Monetary policy Foreign exchange rates

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References listed on IDEAS
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. Nicoletta Batini & Edward Nelson, . "Optimal horizons for inflation targeting," Bank of England working papers 119, Bank of England. [Downloadable!]
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  2. Cavaglia, Stefano & Verschoor, Willem F. C. & Wolff, Christian C. P., 1993. "Further evidence on exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 78-98, February. [Downloadable!] (restricted)
  3. Buiter, Willem H & Jewitt, Ian, 1981. "Staggered Wage Setting with Real Wage Relativities: Variations on a Theme of Taylor," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 49(3), pages 211-28, September.
  4. Alexius, Annika & Vredin, Anders, 1999. " Pricing-to-Market in Swedish Exports," Scandinavian Journal of Economics, Blackwell Publishing, vol. 101(2), pages 223-39, June. [Downloadable!] (restricted)
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This page was last updated on 2008-8-19.

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