Should the ECB respond to exchange rates?
Using a structural, quantitative macro model, this paper investigates benefits of including the real exchange rate of the euro into the monetary policy rule of the European Central Bank (ECB). The problem is considered from viewpoints of both the whole monetary union and a single member state with a national economy more open and facing different structural shocks than the union economy on average. According to the results, the union would benefit more from the exchange rate stabilisation than the member state, when the exchange rate response is set to minimise the loss function calculated for the whole monetary union. Only with rather high exchange rate response by the central bank, would the gain for the member state be larger. Moreover, also when it comes to central bankʼs responses to inflation and output, the common monetary policy does not fit the member state very well. The union as a whole would benefit from central bankʼs relatively stronger response to output than inflation, while for the member state the weights of inflation and output in the policy rule should be set the other way round.
Volume (Year): 18 (2005)
Issue (Month): 1 (Spring)
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- Laurence M. Ball, 1999.
"Policy Rules for Open Economies,"
in: Monetary Policy Rules, pages 127-156
National Bureau of Economic Research, Inc.
- Laurence Ball, 1998. "Policy Rules for Open Economies," RBA Research Discussion Papers rdp9806, Reserve Bank of Australia.
- Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
- Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
- Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
- Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
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