This paper extends McCallum?s (1987) nominal targeting rule to a small open economy by allowing for feedback from the exchange rate. Instead of setting parameters in a McCallum-type targeting rule and simulating, the parameters are estimated using a markov switching model. We argue that a model of discrete parameter changes should be adept at capturing sudden changes in policy regime, such as changes in the degree to which monetary policy admits feedback from the exchange rate. We examine the legitimacy of an inflation targeting rule with occasional exchangerate feedback to describe Swiss monetary policy over the past twenty years.
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number
1995-014.
Length: Date of creation: 1995 Date of revision: Publication status: Published in Journal of Monetary Economics, 37 (1), pages 89-103 (February 1996) Handle: RePEc:fip:fedlwp:1995-014
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