Central Bank Learning, Terms Of Trade Shocks & Currency Risks: Should Only Inflation Matter For Monetary Policy?
AbstractThis paper examines the role of interest rate policy in a small open economy subject to terms of trade shocks, and time-varying currency risks. The private sector makes optimal decisions in an intertemporal non-linear setting with rational, forward-looking expectations. In contrast, the monetary authority practices "least-squares learning" about the evolution of inflation, output growth, and exchange rate depreciation in alternative policy scenarios. Interest rates are set by linear quadratic optimization, with the objectives for inflation, output growth, or depreciation depending on current conditions. The simulation results show that the prefered stance is one which targets inflation only. Including other targets such as growth and exchange rate changes significantly increases output variability, and unambiguously decreases welfare.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 831.
Length: 28 pages
Date of creation: 2002
Date of revision:
Contact details of provider:
Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
Phone: +61 3 8344 5289
Fax: +61 3 8344 6899
Web page: http://www.economics.unimelb.edu.au
More information through EDIRC
Currency risks; learning; parameterized expectations; policy targets;
Other versions of this item:
- G.C. Lim & P.D. McNelis, 2002. "Central Bank Learning, Terms of Trade Shocks & Currency Risks: Should Only Inflation Matter for Monetary Policy?," Computing in Economics and Finance 2002 68, Society for Computational Economics.
- 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
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.:
- Thomas Sargent & Noah Williams & Tao Zha, 2009.
"The Conquest of South American Inflation,"
Journal of Political Economy,
University of Chicago Press, vol. 117(2), pages 211-256, 04.
- Thomas Sargent & Noah Williams & Tao Zha, 2006. "The Conquest of South American Inflation," NBER Working Papers 12606, National Bureau of Economic Research, Inc.
- Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper 2006-20, Federal Reserve Bank of Atlanta.
- Paul McNelis & John Duffy, 1998.
"Approximating and Simulating the Stochastic Growth Model: Parameterized Expectations, Neural Networks, and the Genetic Algorithm,"
GE, Growth, Math methods
9804004, EconWPA, revised 04 May 1998.
- Duffy, John & McNelis, Paul D., 2001. "Approximating and simulating the stochastic growth model: Parameterized expectations, neural networks, and the genetic algorithm," Journal of Economic Dynamics and Control, Elsevier, vol. 25(9), pages 1273-1303, September.
- John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, September.
- Schmitt-Grohé, Stephanie & Uribe, Martín, 2002.
"Closing Small Open Economy Models,"
CEPR Discussion Papers
3096, C.E.P.R. Discussion Papers.
- Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
- Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
- den Haan, Wouter J & Marcet, Albert, 1990.
"Solving the Stochastic Growth Model by Parameterizing Expectations,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 8(1), pages 31-34, January.
- Wouter Denhaan & Albert Marcet, 1990. "FORTRAN code for Simulation Parameterized Expecations Algorithm," QM&RBC Codes 57, Quantitative Macroeconomics & Real Business Cycles.
- Lawrence J. Christiano & Christopher J. Gust, 1999.
"Taylor Rules in a Limited Participation Model,"
NBER Working Papers
7017, National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper Series WP-99-3, Federal Reserve Bank of Chicago.
- L.J. Christiano & C.J. Gust, 1999. "Taylor Rules in a Limited Participation Model," DNB Staff Reports (discontinued) 33, Netherlands Central Bank.
- Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper 9902, Federal Reserve Bank of Cleveland.
- Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
- Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marisa Cerantola).
If references are entirely missing, you can add them using this form.