New International Monetary Arrangements and the Exchange Rate
AbstractI show how to implement in a simple manner the comparison of alternative monetary policy rules in a two-country model of the new generation. These rules are: Full Price Stability, Taylor, Fixed and Managed Exchange Rates. I find, first, that the exchange rate dynamic is non-stationary unless some form of management is undertaken by the respective monetary authorities of the two countries. However, eliminating the excess volatility of the exchange rate does not significantly alter the overall macroeconomic volatility. Second, a floating exchange rate regime based on a Taylor-type rule seems to better approximate the full price stability benchmark, but at the cost of boosting interest rate volatility. In this respect limiting exchange rate flexibility is desirable. Finally, in all cases the model delivers positive cross-country correlation of interest rates but negative cross-country correlation of output.
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Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 517.
Length: 45 pages
Date of creation: 01 Dec 2001
Date of revision:
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
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More information through EDIRC
monetary policy rules; exchange rate;
Other versions of this item:
- Monacelli, Tommaso, 2001. "New International Monetary Arrangements and the Exchange Rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 389-400, October.
- Tommaso Monacelli, 2001. "New International Monetary Arrangements and the Exchange Rate," Working Papers 54, Oesterreichische Nationalbank (Austrian Central Bank).
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-12-14 (All new papers)
- NEP-IFN-2001-12-14 (International Finance)
- NEP-LAM-2001-12-04 (Central & South America)
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