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Instrument rules in monetary policy under heterogeneity in currency trade

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  • Bask, Mikael

    ()
    (Bank of Finland Research)

Abstract

We embed different instrument rules into a New Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, this paper focuses on conditions for a determinate, least-squares learnable rational expectations equilibrium (REE). Under an interest rate rule with only contemporaneous macroeconomic data, the intensity of technical trading or trend-seeking in currency trade does not affect these conditions, except in the case of an extensive use of trend-seeking. On the other hand, if the central bank uses only forward-looking information in its interest rate rule, a determinate and learnable REE is a less likely outcome when trend-seeking in currency trade becomes more popular. The interest rate rule followed by the central bank in the model incorporates interest rate smoothing.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 22/2007.

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Length: 29 pages
Date of creation: 20 Nov 2007
Date of revision:
Handle: RePEc:hhs:bofrdp:2007_022

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: determinacy; DSGE model; interest rate rule; least-squares learning; technical trading;

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References

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Cited by:
  1. Bask, Mikael, 2007. "Long swings and chaos in the exchange rate in a DSGE model with a Taylor rule," Research Discussion Papers 19/2007, Bank of Finland.
  2. Bask, Mikael, 2011. "A Case for Interest Rate Inertia in Monetary Policy," Working Paper Series 2011:16, Uppsala University, Department of Economics.

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