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Sustainable Exchange Rates

Author

Listed:
  • Luigi Bocola

    (Northwestern University)

  • Javier Bianchi

    (Federal Reserve Bank of Minneapolis)

  • Fabrizio Perri

    (Federal Reserve Bank of Minneapolis)

  • Manuel Amador

    (Federal Reserve Bank of Minneapolis)

Abstract

Central Banks of small integrated economies often have an exchange rate objective. We argue that achieving this objective is challenging when the Central Bank is also concerned about the size of its balance sheet. In addition, a world economy operating at the zero lower bound magnifies these difficulties. Specifically, in this paper we developed a framework where (i) the fear of future losses can rationalize why a Central Bank is worried about expanding the size of its balance sheet; (ii) this fear will impose limits on the exchange rate policies that a Central Bank will choose to implement; (iii) news about the future foreign interest rates can have significant effects on the domestic policy in a ZLB environment; (iv) commitment to future policies improves the Central Bank ability to sustain its exchange rate objectives.

Suggested Citation

  • Luigi Bocola & Javier Bianchi & Fabrizio Perri & Manuel Amador, 2016. "Sustainable Exchange Rates," 2016 Meeting Papers 1396, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1396
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    Cited by:

    1. Nwaogwugwu, Chii & Evans, Olaniyi, 2019. "What are the Short-run and Long-run Drivers of Human Capital Development in Nigeria?," MPRA Paper 97130, University Library of Munich, Germany.
    2. Weder di Mauro, Beatrice & Bartels, Bernhard & Eichengreen, Barry, 2016. "No Smoking Gun: Private Shareholders, Governance Rules and Central Bank Financial Behavior," CEPR Discussion Papers 11625, C.E.P.R. Discussion Papers.

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