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.
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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)
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