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Instrument rules in monetary policy under heterogeneity in currency trade

  • Bask, Mikael

We embed different instrument rules into Gal?and Monacelli's new Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, conditions for a determinate and least squares learnable REE are in focus. When a contemporaneous data specification of the rule is used in policy-making, the degree of trend following in currency trade does not affect these conditions, except in case of an extensive use of trend following, whereas a forward expectations specification makes it less likely to have a determinate and learnable REE when the degree of trend following is increasing. We allow for interest rate inertia in the analysis.

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Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 61 (2009)
Issue (Month): 2 ()
Pages: 97-111

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Handle: RePEc:eee:jebusi:v:61:y:2009:i:2:p:97-111
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