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Sticky Prices and Alternative Monetary Feedback Rules: How Robust is the Overshooting Phenomenon?

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  • Bernd Kempa
  • Michael Nelles

Abstract

The present paper incorporates a mechanism of rules-based central-bank interventions into a Dornbusch-type framework. We show that the implied reactions of exchange rates and interest and interest rate differentials in response to a monetary shock depend crucially on the particular monetary policy feedback rule. The Dornbusch case of postively correlated and overshooting nominal and real exchange rates as well as nominal and real interest rate differentials is only one of the possible scenarios of our model. Different scenarios imply zero and negative correlations and even multiple overshooting. [E58, F31, F41]

Suggested Citation

  • Bernd Kempa & Michael Nelles, 1999. "Sticky Prices and Alternative Monetary Feedback Rules: How Robust is the Overshooting Phenomenon?," International Economic Journal, Taylor & Francis Journals, vol. 13(3), pages 1-18.
  • Handle: RePEc:taf:intecj:v:13:y:1999:i:3:p:1-18 DOI: 10.1080/10168739900000001
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    References listed on IDEAS

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    1. Dornbusch, Rudiger, 1982. "PPP Exchange-Rate Rules and Macroeconomic Stability," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 158-165, February.
    2. Miller, Marcus H & Weller, Paul, 1990. "Currency Bubbles Which Affect Fundamentals: A Qualitative Treatment," Economic Journal, Royal Economic Society, vol. 100(400), pages 170-179, Supplemen.
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    6. Frankel, Jeffrey A. & Romer, David & Cyrus, Teresa, 1995. "Trade and Growth in East Asian Countries: Cause and Effect?," Center for International and Development Economics Research (CIDER) Working Papers 233408, University of California-Berkeley, Department of Economics.
    7. Martin Eichenbaum & Charles Evans, 1992. "Some empirical evidence on the effects of monetary policy shocks on exchange rates," Working Paper Series, Macroeconomic Issues 92-32, Federal Reserve Bank of Chicago.
    8. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    9. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-539, August.
    10. Levin, Jay H., 1994. "On sluggish output adjustment and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 13(4), pages 447-458, August.
    11. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    12. Devereux, Michael B. & Purvis, Douglas D., 1990. "Fiscal policy and the real exchange rate," European Economic Review, Elsevier, vol. 34(6), pages 1201-1211, September.
    13. Kathryn Dominguez & Jeffrey A. Frankel, 1990. "Does Foreign Exchange Intervention Work?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 16.
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    Cited by:

    1. Kant, Chander, 2005. "Capital mobility among advanced countries," Journal of Policy Modeling, Elsevier, vol. 27(9), pages 1067-1081, December.
    2. Pierdzioch, Christian, 2003. "Noise Trading and the Effects of Monetary Policy Shocks on Nominal and Real Exchange Rates," Kiel Working Papers 1140, Kiel Institute for the World Economy (IfW).
    3. Pierdzioch, Christian, 2005. "Noise trading and delayed exchange rate overshooting," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 133-156, September.
    4. Yihui Lan, 2003. "The Long-Term Behaviour of Exchange Rates, Part II: Aspects of Exchange-Rate Economics," Economics Discussion / Working Papers 03-06, The University of Western Australia, Department of Economics.
    5. Christian Pierdzioch, 2007. "Households' Preferences and Exchange Rate Overshooting," International Economic Journal, Taylor & Francis Journals, pages 297-316.

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