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Monetary Policy and the Volatility of Real Exchange Rates in New Zealand

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  • Kenneth D. West

Abstract

The relationship between interest rates and exchange rates is puzzling and poorly understood. But under some standard assumptions, interest rates can be adjusted to smooth real exchange rate movements at the possible price of increased volatility in other variables. In New Zealand, estimates made under some generous suppositions about what monetary policy is able to accomplish suggest that decreasing real exchange rate volatility by about 25% would require increasing output volatility by about 10-15%, inflation volatility by about 0-15% and interest rate volatility by about 15-40%.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10280.

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Date of creation: Feb 2004
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Publication status: published as Kenneth West, 2003. "Monetary policy and the volatility of real exchange rates in New Zealand," New Zealand Economic Papers, Taylor and Francis Journals, vol. 37(2), pages 175-196.
Handle: RePEc:nbr:nberwo:10280

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  1. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  2. Cheung, Yin-Wong & Chinn, Menzie & Garcia Pascual, Antonio, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series qt5fc508pt, Department of Economics, UC Santa Cruz.
  3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers, C.V. Starr Center for Applied Economics, New York University 97-32, C.V. Starr Center for Applied Economics, New York University.
  4. Pierre-Olivier Gourinchas & Aaron Tornell, 2002. "Exchange Rate Dynamics, Learning and Misperception," NBER Working Papers 9391, National Bureau of Economic Research, Inc.
  5. Galí, Jordi & Monacelli, Tommaso, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3346, C.E.P.R. Discussion Papers.
  6. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3279, C.E.P.R. Discussion Papers.
  7. Aaron Drew & L Christopher Plantier, 2000. "Interest rate smoothing in New Zealand and other dollar bloc countries," Reserve Bank of New Zealand Discussion Paper Series DP2000/10, Reserve Bank of New Zealand.
  8. Huang, Angela & Margaritis, Dimitri & Mayes, David, 2001. "Monetary policy rules in practice: Evidence from New Zealand," Research Discussion Papers, Bank of Finland 18/2001, Bank of Finland.
  9. David K. Backus, 2001. "Affine Term Structure Models and the Forward Premium Anomaly," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 279-304, 02.
  10. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February.
  11. repec:fth:bfdipa:18/2001 is not listed on IDEAS
  12. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 248-252, May.
  13. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  14. Engel, Charles & West, Kenneth D., 2006. "Taylor Rules and the Deutschmark: Dollar Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(5), pages 1175-1194, August.
  15. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2807, C.E.P.R. Discussion Papers.
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Cited by:
  1. Juan Pablo Medina & Anella Munro & Claudio Soto, 2007. "What Drives the Current Account in Commodity Exporting Countries? The Cases of Chile and New Zealand," Working Papers Central Bank of Chile, Central Bank of Chile 446, Central Bank of Chile.
  2. Hsing, Yu, 2009. "Analysis of the Behavior of the New Zealand Dollar Exchange Rate: Comparison of Four Major Models," Review of Applied Economics, Review of Applied Economics, Review of Applied Economics, vol. 5(1-2).
  3. Kirdan Lees, 2006. "What do robust policies look like for open economy inflation targeters?," Reserve Bank of New Zealand Discussion Paper Series DP2006/08, Reserve Bank of New Zealand.
  4. Anella Munro, 2004. "What drives the New Zealand dollar?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, june.
  5. Nils Björksten & Arthur Grimes & Özer Karagedikli & Christopher Plantier, 2004. "What can the Taylor rule tell us about a currency union between New Zealand and Australia?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/05, Reserve Bank of New Zealand.
  6. Kirdan Lees, 2003. "The stabilisation problem: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/08, Reserve Bank of New Zealand.
  7. Jian Wang, 2007. "Home bias, exchange rate disconnect, and optimal exchange rate policy," Working Papers, Federal Reserve Bank of Dallas 0701, Federal Reserve Bank of Dallas.
  8. Ásgeir Daníelsson & Magnús F. Gudmundsson & Svava J. Haraldsdóttir & Thorvardur T. Ólafsson & Ásgerdur Ó. Pétursdóttir & Thórarinn G. Pétursson & Rósa Sveinsdóttir, 2009. "QMM. A Quarterly Macroeconomic Model of the Icelandic Economy," Economics wp41, Department of Economics, Central bank of Iceland.
  9. Jes�s Rodríguez López & Hugo Rodríguez Mendizábal, 2007. "The Optimal Degree of Exchange Rate Flexibility: a Target Zone Approach," Review of International Economics, Wiley Blackwell, vol. 15(4), pages 803-822, 09.
  10. Dennis, Richard & Leitemo, Kai & Söderström, Ulf, 2007. "Monetary Policy in a Small Open Economy with a Preference for Robustness," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6067, C.E.P.R. Discussion Papers.
  11. James Twaddle & David Hargreaves & Tim Hampton, 2006. "Other stabilisation objectives within an inflation targeting regime: Some stochastic simulation experiments," Reserve Bank of New Zealand Discussion Paper Series DP2006/04, Reserve Bank of New Zealand.

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