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Comparing Monetary Policy Strategies: Towards a Generalized Reaction Function

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  • Felix Hammermann
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    Abstract

    There seems to be no consensus in the literature with respect to monetary policy strategies in combination with flexible exchange rate regimes. Therefore, this paper determines what the alternative strategies inflation targeting, Taylor rule, monetary conditions index, and managed floating have in common. The fact that all strategies build on reaction functions which use the short-term interest rate as an important or even the single monetary policy instrument allows a generalized reaction function for all strategies to be derived. Future research may use such a generalized reaction function for describing and determining monetary policy in emerging market economies with flexible exchange rate regimes.

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    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1170.

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    Length: 28 pages
    Date of creation: Jun 2003
    Date of revision:
    Handle: RePEc:kie:kieliw:1170

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    Keywords: Monetary Policy; Inflation Targeting; Taylor Rule; Monetary Conditions Index; Managed Floating;

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
    2. Bofinger, Peter & Wollmershaeuser, Timo, 2001. "Managed Floating: Understanding the New International Monetary Order," CEPR Discussion Papers 3064, C.E.P.R. Discussion Papers.
    3. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
    4. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
    5. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    6. Peter Breuer, 1999. "Central Bank Participation in Currency Options Markets," IMF Working Papers 99/140, International Monetary Fund.
    7. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
    8. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
    9. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    10. Eika, K.H. & Ericsson, N.R. & Nymoen, R., 1996. "Hazards in Implementing a Monetary Conditions Index," Memorandum 32/1996, Oslo University, Department of Economics.
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