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The influence of Taylor rule deviations on the real exchange rate

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  • Wilde, Wolfram

Abstract

This paper explores the influence of Taylor rule deviations on the Deutschmark-Dollar and Yen-Dollar real exchange rate. Taylor rule deviations occur if the short term interest rate persistently deviates from an interest rate path consistent with the Taylor rule. It uses the behavior rational expectation exchange rate model, where the monetary policy is captured by a Taylor rule. The set of exchange rate fundamentals is constructed in two different ways. In the baseline specification only the traditional macro fundamentals are considered, whereas in the second specification Taylor rule deviations are included as well. This paper finds that Taylor rule deviations are important determinants of the exchange rate as the second specification fits the data much better than the baseline.

Suggested Citation

  • Wilde, Wolfram, 2012. "The influence of Taylor rule deviations on the real exchange rate," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 51-61.
    • Handle: RePEc:eee:reveco:v:24:y:2012:i:c:p:51-61
    DOI: 10.1016/j.iref.2012.01.001
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    Cited by:

    1. Christina Anderl & Guglielmo Maria Caporale, 2022. "Exchange rate parities and Taylor rule deviations," Empirical Economics, Springer, vol. 63(4), pages 1809-1835, October.
    2. Lafuente, Juan A. & Pérez, Rafaela & Ruiz, Jesús, 2014. "Time-varying inflation targeting after the nineties," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 400-408.
    3. Yu-Hsi Chou, 2017. "Dissecting Exchange Rates and Fundamentals in the Modern Floating Era: The Role of Permanent and Transitory Shocks," Review of International Economics, Wiley Blackwell, vol. 25(1), pages 165-194, February.
    4. Fang‐Shuo Chang & Shiu‐Sheng Chen & Po‐Yuan Wang, 2020. "Politics and the UK's monetary policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(5), pages 486-522, November.
    5. Chen, Chuanglian & Yao, Shujie & Ou, Jinghua, 2017. "Exchange rate dynamics in a Taylor rule framework," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 158-173.

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    More about this item

    Keywords

    Exchange rate disconnect puzzle; Exchange rate fluctuations; Taylor rule;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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