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Taylor rules, fear of floating and the role of the exchange rate in monetary policy: a case of observational equivalence

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  • Juan Paez-Farrell

    ()
    (School of Business and Economics, Loughborough University, UK)

Abstract

This paper considers the role of the exchange rate in monetary policy rules. It argues that much recent research aimed at determining the extent of concern for exchange rate stabilisation on the part of central banks is potentially flawed. If policy makers are subject to fear of floating – whereby they aim to stabilise exchange rates but without revealing this to the public – current estimated models cannot may provide insufficient information to determine policy objectives. In effect, several structural models may yield observationally equivalent interest rate rules. The paper uses two small open economy models to highlight this issue.

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File URL: http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/JPF_WP2012_07.pdf
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Bibliographic Info

Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2012_07.

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Date of creation: Jun 2012
Date of revision: Jun 2012
Handle: RePEc:lbo:lbowps:2012_07

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Postal: Loughborough, Leicestershire, LE11 3TU
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Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html
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Keywords: Small open economies; monetary policy; exchange rates; Taylor rule; fear of floating.;

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  2. Timothy Kam & Kirdan Lees & Philip Liu, 2006. "Uncovering The Hit-List For Small Inflation Targeters: A Bayesian Structural Analysis," ANU Working Papers in Economics and Econometrics, Australian National University, College of Business and Economics, School of Economics 2006-473, Australian National University, College of Business and Economics, School of Economics.
  3. Richard Dennis & Kai Leitemo & Ulf Söderström, 2007. "Monetary policy in a small open economy with a preference for robustness," Working Paper Series, Federal Reserve Bank of San Francisco 2007-04, Federal Reserve Bank of San Francisco.
  4. Alejandro Justiniano & Bruce Preston, 2010. "Monetary policy and uncertainty in an empirical small open-economy model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(1), pages 93-128.
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