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On Monetary Policy and Exchange Rate Targeting

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This paper examines the effects of monetary policy undertaken to achieve an exchange rate target under a managed floating exchange rate system. It is motivated by evidence that central banks have at times geared monetary policy to exchange rate targets. Using the well-known Dornbusch model with a permanent shock in the financial sector, the author incorporates a reaction function where monetary growth is aimed at the gap between the target and actual exchange rate. It turns out that monetary intervention reduces the initial degree of exchange rate overshooting, although it causes the exchange rate to overshoot a second time. Also, deviations of the exchange rate from its target level are reduced, but the exchange rate converges more quickly when there is no monetary intervention.

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  • Levin, Jay H., 1991. "On Monetary Policy and Exchange Rate Targeting," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 44(4), pages 332-342.
    • Handle: RePEc:ris:ecoint:0468
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