New International Monetary Arrangements and the Exchange Rate
AbstractI show how to implement in a simple manner the comparison of alternative monetary policy rules in a two- country model of the new generation. These rules are: Full Price Stability, Taylor, Fixed and Managed Exchange Rates. I find, first, that the exchange rate dynamic is non-stationary unless some form of management is undertaken by the respective monetary authorities of the two countries. However, eliminating the excess volatility of the exchange rate does not significantly alter the overall macroeconomic volatility. Second, a floating exchange rate regime based on a Taylor-type rule seems to better approximate the full price stability benchmark, but at the cost of boosting interest rate volatility. In this respect limiting exchange rate flexibility is desirable. Finally, in all cases the model delivers positive cross-country correlation of interest rates but negative cross-country correlation of output.
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Bibliographic InfoPaper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 54.
Date of creation: 10 Oct 2001
Date of revision:
Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
Other versions of this item:
- Monacelli, Tommaso, 2001. "New International Monetary Arrangements and the Exchange Rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 389-400, October.
- Tommaso Monacelli, 2001. "New International Monetary Arrangements and the Exchange Rate," Boston College Working Papers in Economics 517, Boston College Department of Economics.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-10-29 (All new papers)
- NEP-CBA-2001-10-29 (Central Banking)
- NEP-IFN-2001-10-29 (International Finance)
- NEP-MAC-2001-10-29 (Macroeconomics)
- NEP-MON-2001-10-29 (Monetary Economics)
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