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Policy Responses to Exchange-rate Movements

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  • Laurence Ball

Abstract

This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or commodity prices. The paper compares the model's prescriptions to the policies of an actual central bank, the Bank of Canada. Finally, the paper considers the role of fiscal policy in an open economy. Coordinated fiscal and monetary responses to exchange-rate movements stabilize output at the sectoral as well as aggregate level.
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Suggested Citation

  • Laurence Ball, 2010. "Policy Responses to Exchange-rate Movements," Open Economies Review, Springer, vol. 21(2), pages 187-199, April.
    • Handle: RePEc:kap:openec:v:21:y:2010:i:2:p:187-199
    DOI: 10.1007/s11079-009-9160-6
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    References listed on IDEAS

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    1. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156, National Bureau of Economic Research, Inc.
    2. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March.
    3. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
    4. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, March.
    5. Laurence Ball, 2010. "Policy Responses to Exchange-rate Movements," Open Economies Review, Springer, vol. 21(2), pages 187-199, April.
    6. Christopher Ragan, 2005. "The Exchange Rate and Canadian Inflation Targeting," Staff Working Papers 05-34, Bank of Canada.
    7. Christopher Ragan, 2005. "The Exchange Rate and Canadian Inflation Targeting," Bank of Canada Review, Bank of Canada, vol. 2005(Autumn), pages 41-50.
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    Cited by:

    1. Nannette Lindenberg & Frank Westermann, 2009. "How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States," IEER Working Papers 79, Institute of Empirical Economic Research, Osnabrueck University.
    2. Laurence Ball, 2010. "Policy Responses to Exchange-rate Movements," Open Economies Review, Springer, vol. 21(2), pages 187-199, April.
    3. Kenza Benhima, 2012. "Exchange Rate Volatility and Productivity Growth: The Role of Liability Dollarization," Open Economies Review, Springer, vol. 23(3), pages 501-529, July.
    4. Hyuk Rhee & Nurlan Turdaliev, 2012. "Targeting Rules for an Open Economy," Open Economies Review, Springer, vol. 23(3), pages 447-471, July.
    5. Lebogang Mateane & Christian R. Proaño, 2020. "Does monetary policy react asymmetrically to exchange rate misalignments? Evidence for South Africa," Empirical Economics, Springer, vol. 58(4), pages 1639-1658, April.
    6. Stuart Landon & Constance Smith, 2010. "Government Revenue Volatility: The Case of Alberta, an Energy Dependent Economy," EERI Research Paper Series EERI_RP_2010_23, Economics and Econometrics Research Institute (EERI), Brussels.
    7. Waldyr Areosa & Marta Areosa, 2012. "The Signaling Effect of Exchange Rates: pass-through under dispersed information," Working Papers Series 282, Central Bank of Brazil, Research Department.

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    More about this item

    Keywords

    Exchange rates; Monetary policy; Bank of Canada; E52; E63; F41;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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