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Simple Monetary Policy Rules and Exchange Rate Uncertainty

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Author Info
Leitemo, Kai () (Research Department)
Söderström, Ulf () (Research Department, Central Bank of Sweden)

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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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Publisher 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
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Related research
Keywords: Open economy; Exchange rate determination; Model uncertainty; Robustness of policy rules;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nicoletta Batini & Edward Nelson, . "Optimal horizons for inflation targeting," Bank of England working papers 119, Bank of England. [Downloadable!]
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  2. Cavaglia, Stefano & Verschoor, Willem F. C. & Wolff, Christian C. P., 1993. "Further evidence on exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 78-98, February. [Downloadable!] (restricted)
  3. Buiter, Willem H & Jewitt, Ian, 1981. "Staggered Wage Setting with Real Wage Relativities: Variations on a Theme of Taylor," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 49(3), pages 211-28, September.
  4. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Alexius, Annika & Vredin, Anders, 1999. " Pricing-to-Market in Swedish Exports," Scandinavian Journal of Economics, Blackwell Publishing, vol. 101(2), pages 223-39, June. [Downloadable!] (restricted)
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