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Monetary Policy Rules and the Exchange Rate

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  • Benigno, Gianluca
  • Benigno, Pierpaolo

Abstract

A positive and normative evaluation of alternative monetary policy regimes is addressed in a two-country general equilibrium model. The behaviour of the exchange rate, as well as of the other macroeconomic variables, depends crucially on the monetary regime chosen, though not necessarily on monetary shocks. The centralized welfare criterion presents a trade-off between stabilizing the economy around the flexible-price allocation and reducing the volatility of the nominal interest rates. In this framework, some form of control of the exchange rate is welfare improving.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2807.

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Date of creation: May 2001
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Handle: RePEc:cpr:ceprdp:2807

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Keywords: Exchange Rate Regimes; Monetary Policy Rules; Welfare Criterion;

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References

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  1. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  2. McCallum, Bennett T. & Nelson, Edward, 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Seminar Papers 644, Stockholm University, Institute for International Economic Studies.
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  4. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
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  15. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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