Country-Specific Risk Premium, Taylor Rules, and Exchange Rates
AbstractThe adoption of a Taylor-type monetary policy rule and an inflation target for emerging market economies that choose a flexible exchange rate regime is often advocated. This paper investigates the issue of exchange rate determination when interest-rate feedback rules are implemented in a continuous-time optimizing model of a small open economy facing an imperfect global capital market. It is demonstrated that when a risk premium on external debt affects the monetary policy transmission mechanism, the Taylor principle is not a necessary condition for determinacy of equilibrium. On the other hand, it is shown that exchange rate dynamics critically depends on whether monetary policy is active or passive.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 13553.
Date of creation: 2009
Date of revision:
Risk Premium on Foreign Debt; Taylor Rules; Exchange Rate Dynamics;
Other versions of this item:
- Barbara Annicchiarico & Alessandro Piergallini, 2011. "Country‐Specific Risk Premium, Taylor Rules, and Exchange Rates," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 40(1-2), pages 1-27, 02.
- Barbara Annicchiarico & Alessandro Piergallini, 2010. "Country-Specific Risk Premium, Taylor Rules, and Exchange Rates," CEIS Research Paper 174, Tor Vergata University, CEIS, revised 08 Nov 2010.
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-28 (All new papers)
- NEP-IFN-2009-02-28 (International Finance)
- NEP-MAC-2009-02-28 (Macroeconomics)
- NEP-MON-2009-02-28 (Monetary Economics)
- NEP-OPM-2009-02-28 (Open Economy Macroeconomic)
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.:
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