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Simple Monetary Policy Rules and Exchange Rate Uncertainty

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  • Leitemo, Kai

    ()
    (Research Department)

  • Söderström, Ulf

    ()
    (Research Department, Central Bank of Sweden)

Abstract

We analyze the performance and robustness of some common simple rules for monetary policy in a New-Keynesian open economy model under different assumptions about the exchange rate model. Adding the exchange rate to an optimized Taylor rule gives only small improvements in terms of economic stability in most model configurations. The Taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation. Our results thus indicate that the Taylor rule may be sufficient to stabilize a small open economy, also under exchange rate model uncertainty.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 122.

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Length: 41 pages
Date of creation: 01 Jun 2001
Date of revision:
Publication status: Published in Journal of International Money and Finance, 2005, pages 481-507.
Handle: RePEc:hhs:rbnkwp:0122

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Keywords: Open economy; Exchange rate determination; Model uncertainty; Robustness of policy rules;

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