Optimal real exchange rate targeting: a stochastic analysis
AbstractThis paper extends the literature on real exchange rate targeting inside a stochastic optimization framework where the real exchange rate displays long run mean reversion while temporarily reflecting a “liquidity effect”. When real exchange rate volatility is constant, an active stabilization rule is welfare increasing with respect to non intervention only beyond a given volatility threshold. Moreover, the welfare gains are larger the lower is the degree of mean reversion. Under a stochastic volatility assumption, the policy maker’s intertemporal discount rate has instead a major influence, and real exchange rate targeting is welfare increasing only if the policymaker is sufficiently farsighted.
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Bibliographic InfoPaper provided by University of Brescia, Department of Economics in its series Working Papers with number ubs0401.
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Other versions of this item:
- Francesco Menoncin & Marco Tronzano, 2007. "Optimal Real Exchange Rate Targeting. A Stochastic Analysis," Revue économique, Presses de Sciences-Po, vol. 58(4), pages 807-840.
- NEP-ALL-2006-03-05 (All new papers)
- NEP-FMK-2006-03-05 (Financial Markets)
- NEP-IFN-2006-03-05 (International Finance)
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- Roberto Casarin & Carmine Trecroci, 2006.
"Business Cycle and Stock Market Volatility: A Particle Filter Approach,"
ubs0603, University of Brescia, Department of Economics.
- Casarin, Roberto & Trecroci, Carmine, 2006. "Business Cycle and Stock Market Volatility: A Particle Filter Approach," Economics Papers from University Paris Dauphine 123456789/6830, Paris Dauphine University.
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