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Monetary policy rules and the exchange rate channel

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  • Kai Leitemo
  • �istein R�island
  • Ragnar Torvik

Abstract

A discretionary monetary policy leads to suboptimal stabilization in models with the New Keynesian assumption of forward-looking price setting, and various policy rules that improve the discretionary equilibrium have been considered in the literature. The empirical evidence for forward-looking price determination is mixed. This note shows, however, that forward-looking price setting is not essential for the results. Policy rules that improve welfare under the New Keynesian assumptions, also do so within a traditional backward-looking model if asset prices, such as the exchange rate, are forward-looking.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100500358684
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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 15 (2005)
Issue (Month): 16 ()
Pages: 1165-1170

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Handle: RePEc:taf:apfiec:v:15:y:2005:i:16:p:1165-1170

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  1. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
  2. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
  3. Dennis, Richard, 2001. "Inflation Expectations and the Stability Properties of Nominal GDP Targeting," Economic Journal, Royal Economic Society, vol. 111(468), pages 103-13, January.
  4. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
  5. Leitemo, Kai & Roisland, Oistein & Torvik, Ragnar, 2002. " Time Inconsistency and the Exchange Rate Channel of Monetary Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 391-97, September.
  6. John M. Roberts, 1998. "Inflation expectations and the transmission of monetary policy," Finance and Economics Discussion Series 1998-43, Board of Governors of the Federal Reserve System (U.S.).
  7. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
  8. Leitemo, Kai, 2004. "A game between the fiscal and the monetary authorities under inflation targeting," European Journal of Political Economy, Elsevier, vol. 20(3), pages 709-724, September.
  9. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  10. Frank Smets & Rafael Wouters, 2002. "Openness: imperfect exchange rate pass-through and monetary policy," Working Paper Series 128, European Central Bank.
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