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Exchange Rate Stabilisation, Learning And The Taylor Principle

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  • HEINZ‐PETER SPAHN

Abstract

The paper explores whether central banks can keep their interest rates independent from given foreign rates, and to what extent interest policies designed to stabilise nominal exchange rate changes can be applied instead of, or in addition to, the traditional interest rate response to inflation gaps. This modification of a Taylor Rule is analysed in a simple macro model with some New Keynesian features. Information is imperfect; agents cannot build rational expectations but try to learn ‘true’ market relations. Results show that the Taylor Principle can be generalised in an open economy with flexible exchange rates.

Suggested Citation

  • Heinz‐Peter Spahn, 2007. "Exchange Rate Stabilisation, Learning And The Taylor Principle," Australian Economic Papers, Wiley Blackwell, vol. 46(2), pages 136-151, June.
    • Handle: RePEc:bla:ausecp:v:46:y:2007:i:2:p:136-151
    DOI: 10.1111/j.1467-8454.2007.00310.x
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    References listed on IDEAS

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    1. Ellison, Martin & Sarno, Lucio & Vilmunen, Jouko, 2004. "Monetary policy and learning in an open economy," Bank of Finland Research Discussion Papers 3/2004, Bank of Finland.
    2. Mark Crosby & Timothy Kam & Kirdan Lees, 2008. "How Costly is Exchange Rate Stabilisation for an Inflation Targeter? The Case of Australia," The Economic Record, The Economic Society of Australia, vol. 84(266), pages 354-365, September.
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    5. Martin Ellison & Lucio Sarno & Jouko Vilmunen, 2004. "Monetary policy and learning in an open economy," Macroeconomics 0404022, University Library of Munich, Germany.
    6. Benigno, Gianluca & Benigno, Pierpaolo, 2004. "Designing target rules for international monetary policy cooperation," LSE Research Online Documents on Economics 3759, London School of Economics and Political Science, LSE Library.
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