IDEAS home Printed from https://ideas.repec.org/p/tam/wpaper/0646.html
   My bibliography  Save this paper

The Exchange Rate Targeting of Central Banks Revisited: The Role of Long-term Interest Rates

Author

Listed:
  • Markus Lahtinen
  • Petri Mäki-Fränti

    (School of Management, University of Tampere)

Abstract

Using a New Keynesian macro model, the paper reconsiders the question, whether the central banks should directly respond to exchange rate movements. It is assumed that the transmission of monetary policy to output is carried out by the long-term interest rate, which is determined as a sum of expectations of short-term interest rates and a non-negligible term premium. The second key feature of the model is the assumption that the pass-through of the nominal exchange rate to consumer prices follows a slow distributed-lag process. According to the results, the central banks could gain from stabilizing the exchange rate movements more than suggested in the previous literature. The welfare gains are more clearly seen in the reduced volatility of inflation than stabilization of output, however.

Suggested Citation

  • Markus Lahtinen & Petri Mäki-Fränti, 2006. "The Exchange Rate Targeting of Central Banks Revisited: The Role of Long-term Interest Rates," Working Papers 0646, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:0646
    as

    Download full text from publisher

    File URL: http://urn.fi/urn:isbn:951-44-6582-2
    File Function: First version, 2006
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Open economy; Exchange rate determination; Monetary policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tam:wpaper:0646. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sami Remes (email available below). General contact details of provider: https://edirc.repec.org/data/khutafi.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.