Money Supply Rules and Exchange Rate Dynamics
AbstractThis paper examines the implications of monetary policy rules for exchange rate dynamics. I extend a standard New Open Economy Macroeconomics model with the introduction of a simple money supply rule, whereby central banks change their monetary policy if output diverges from potential output or if inflation diverges from the target inflation. A key result is that, in the case of permanent technology and monetary shocks, the nominal exchange rate does not follow a random walk; instead, the exchange rate undershoots its long-run value. An undershooting of the exchange rate derives from the active monetary policy that both countries conduct.
Download InfoIf 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.
Bibliographic InfoPaper provided by Aboa Centre for Economics in its series Discussion Papers with number 62.
Date of creation: Dec 2010
Date of revision:
Monetary policy rules; open economy macroeconomics; exchange rate;
Other versions of this item:
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-23 (All new papers)
- NEP-CBA-2011-01-23 (Central Banking)
- NEP-DGE-2011-01-23 (Dynamic General Equilibrium)
- NEP-IFN-2011-01-23 (International Finance)
- NEP-MAC-2011-01-23 (Macroeconomics)
- NEP-MON-2011-01-23 (Monetary Economics)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Aleksandra Maslowska).
If references are entirely missing, you can add them using this form.