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Real exchange rate persistence and systematic monetary policy behaviour

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  • Jan J J Groen
  • Akito Matsumoto

Abstract

This paper estimates forward-looking monetary policy rules for Germany over the 1979-98 period and for the United Kingdom for the periods 1979-90 and 1992-98. The estimation results indicate that there were substantial differences between systematic monetary policy in Germany and in the United Kingdom, as well as shifts in systematic monetary policy in the United Kingdom, over this period. The paper analyses the implications of these estimated policy rules for real exchange rate behaviour in an open economy dynamic stochastic general equilibrium model. The analysis shows that real exchange rate persistence could be attributed to the persistence of real shocks and interest rate smoothing behaviour of central banks. However, the observed cross-country asymmetry in systematic monetary policy behaviour elevates real exchange rate persistence to realistic levels, whereas changes in asymmetric policy behaviour alter the character of real exchange rate persistence.

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Paper provided by Bank of England in its series Bank of England working papers with number 231.

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Date of creation: Oct 2004
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Handle: RePEc:boe:boeewp:231

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Citations

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Cited by:
  1. Alessandro Rebucci & Akito Matsumoto & Pietro Cova & Massimiliano Pisani, 2011. "New Shocks and Asset Price Volatility in General Equilibrium," IMF Working Papers 11/110, International Monetary Fund.
  2. Leonardo Morales-Arias & Alexander Dross, 2010. "Adaptive Forecasting of Exchange Rates with Panel Data," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 285, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. Ida Wolden Bache, 2006. "Assessing the structural VAR approach to exchange rate pass-through," Computing in Economics and Finance 2006, Society for Computational Economics 309, Society for Computational Economics.
  4. Pietro Cova & Alessandro Rebucci & Akito Matsumoto & Massimiliano Pisani, 2008. "New Shocks, Exchange Rates and Equityprices," IMF Working Papers 08/284, International Monetary Fund.
  5. Martinez-Garcia, Enrique & Sondergaard, Jens, 2009. "The real exchange rate in sticky-price models: does investment matter?," Bank of England working papers, Bank of England 368, Bank of England.
  6. Jon Steinsson, 2005. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models," Economics, Department of Economics, Central bank of Iceland wp28_jonst, Department of Economics, Central bank of Iceland.
  7. Nelson C. Mark, 2009. "Changing Monetary Policy Rules, Learning, and Real Exchange Rate Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(6), pages 1047-1070, 09.
  8. Morales-Arias, Leonardo & Moura, Guilherme V., 2013. "Adaptive forecasting of exchange rates with panel data," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(3), pages 493-509.

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