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Tobin's Q channel and monetary policy rules under incomplete exchange rate pass-through

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  • Ida, Daisuke

Abstract

This paper focuses on the role of the Tobin's Q channel in a two-country framework in which exporting firms set their prices on the basis of local currency pricing. Incomplete exchange rate pass-through significantly affects the Tobin's Q channel in each country compared with the case of complete exchange rate pass-through. We explore whether different specifications of monetary policy enhance social welfare. Regardless of the degree of home bias, a monetary policy rule that stabilizes domestic asset prices attains preferable outcomes to several alternative policy rules considered in our analysis. Notably, there are large gains from employing a domestic asset price rule when the home bias is large. A monetary policy rule that stabilizes the asset prices of both countries results in worse outcomes. Our simulation results suggest that stabilizing asset prices is important in an open economy with incomplete exchange rate pass-through.

Suggested Citation

  • Ida, Daisuke, 2013. "Tobin's Q channel and monetary policy rules under incomplete exchange rate pass-through," Economic Modelling, Elsevier, vol. 33(C), pages 733-740.
  • Handle: RePEc:eee:ecmode:v:33:y:2013:i:c:p:733-740
    DOI: 10.1016/j.econmod.2013.05.017
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    Keywords

    Monetary policy rule; Incomplete exchange rate pass-through; Tobin's Q channel; Asset prices;

    JEL classification:

    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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