Ram Sharan Kharel (Brunel University) Christopher Martin (Brunel University) Costas Milas () (Keele University, Centre for Economic Research and School of Economic and Management Studies)
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We estimate a flexible non-linear monetary policy rule for the UK to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under-valuations of more than 4\% and over-valuations of more than 5\%. Third, the response of policymakers to inflation is smaller when the exchange rate is over-valued and larger when it is under-valued. None of these responses is allowed for in the widely-used Taylor rule, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper.
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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number
KERP 2006/17.
Length: 24 pages Date of creation: Sep 2006 Date of revision: Handle: RePEc:kee:kerpuk:2006/17
Note: We thank Kevin Lee and Roberto Gonzalez for useful comments and suggestions. Contact details of provider: Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom Phone: +44 (0)1782 584581 Fax: +44 (0)1782 717577 Email: Web page: http://www.keele.ac.uk/depts/ec/cer/ More information through EDIRC
Order Information: Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom Email: Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm
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Find related papers by JEL classification: C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing 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
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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.:
Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2001.
"European Inflation Dynamics,"
NBER Working Papers
8218, National Bureau of Economic Research, Inc.
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