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Do Central Banks Respond to Exchange Rate Movements? Some New Evidence from Structural Estimation

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  • Wei Dong
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Abstract

This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand and the United Kingdom. We develop and estimate a structural general equilibrium two-sector model with sticky prices and wages and limited exchange rate pass-through. Different specifications for the monetary policy rule and the real exchange rate process are examined. The results indicate that the Reserve Bank of Australia, the Bank of Canada and the Bank of England paid close attention to real exchange rate movements, whereas the Reserve Bank of New Zealand did not seem to incorporate exchange rate movements explicitly into their policy rule. With a higher degree of intrinsic inflation persistence, the central bank of New Zealand seems less concerned about future inflation pressure induced by current exchange rate movements. In addition, the structure of the shocks driving inflation and output variations in New Zealand is such that it may be sufficient for the Reserve Bank of New Zealand to only respond to exchange rate movements indirectly through stabilizing inflation and output.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 08-24.

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Length: 46 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-24

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Related research

Keywords: Exchange rates; Monetary policy framework; International topics;

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Cited by:
  1. Carlos Garcia & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," IMF Working Papers 09/234, International Monetary Fund.
  2. Jaromir Baxa & Roman Horvath & Borek Vasicek, 2010. "How Does Monetary Policy Change? Evidence on Inflation Targeting Countries," Working Papers 2010/02, Czech National Bank, Research Department.
  3. Carlos Garcia & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes1," ILADES-Georgetown University Working Papers inv226, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  4. Eurilton Araújo & Débora Gouveia, 2013. "Calvo-type rules and the forward-looking behavior of inflation targeting central banks," Economics Bulletin, AccessEcon, vol. 33(3), pages 2042-2051.
  5. Garcia, Carlos J. & Restrepo, Jorge E. & Roger, Scott, 2011. "How much should inflation targeters care about the exchange rate?," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1590-1617.
  6. Ronald H. Lange, 2013. "Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(5), pages 612-632, September.
  7. Scott Roger, 2009. "Inflation Targeting At 20," IMF Working Papers 09/236, International Monetary Fund.
  8. Hilde C. Bjørnland & Jørn I. Halvorsen, 2010. "How does monetary policy respond to exchange rate movements? New international evidence," Working Papers 0001, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.

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