Advanced Search
MyIDEAS: Login

Currency Misalignments and Optimal Monetary Policy: A Reexamination

Contents:

Author Info

  • Charles Engel

Abstract

This paper examines optimal monetary policy in an open-economy two-country model with sticky prices. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target not only inflation and the output gap, but also the currency misalignment. However the interest rate reaction function that supports this targeting rule may involve only the CPI inflation rate. This result illustrates how examination of "instrument rules" may hide important trade-offs facing policymakers that are incorporated in "targeting rules". The model is a modified version of Clarida, Gali, and Gertler's (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. Besides highlighting the importance of the currency misalignment, our model also gives a rationale for targeting CPI, rather than PPI, inflation.

Download Info

If 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.
File URL: http://www.nber.org/papers/w14829.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14829.

as in new window
Length:
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:nbr:nberwo:14829

Note: IFM ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. David Parsley & Helen Popper, 2009. "Evaluating Exchange Rate Management An Application to Korea," Working Papers 282009, Hong Kong Institute for Monetary Research.
  2. Chan Wang & Heng-fu Zou, 2013. "On the efficiency of monetary and fiscal policy in open economies," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 191-217, May.
  3. Ariel Burstein, 2010. "The Research Agenda: Ariel Burstein on International Trade and Macroeconomics," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 12(1), November.
  4. Vincenzo Cuciniello & Luisa Lambertini, 2009. "Optimal Exchange-Rate Targeting with Large Labor Unions," Working Papers 200901, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne.
  5. Antonio Forte, 2010. "The European Central Bank, the Federal Reserve and the Bank of England: Is the Taylor Rule a useful benchmark for the last decade?," Journal of Economics and Econometrics, Economics and Econometrics Research Institute (EERI), Brussels, vol. 53(2), pages 1-31.
  6. Charles Engel, 2010. "Exchange rate policies," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 229-250 Bank for International Settlements.
  7. Ozge Senay & Alan Sutherland, 2010. " Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy," CDMA Working Paper Series 1005, Centre for Dynamic Macroeconomic Analysis.
  8. Ippei Fujiwara & Kozo Ueda, 2010. "The Fiscal Multiplier and Spillover in a Global Liquidity Trap," IMES Discussion Paper Series 10-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
  9. Piotr Banbula & Witold Kozinski & Michal Rubaszek, 2011. "The role of the exchange rate in monetary policy in Poland," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 285-295 Bank for International Settlements.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14829

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.