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A DSGE model for a SOE with systematic interest and foreign exchange policies in which policymakers exploit the risk premium for stabilization purposes

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  • Escudé, Guillermo J.

Abstract

This paper builds a DSGE model for a small open economy (SOE) in which the central bank intervenes the domestic currency bond and FX markets using two policy rules: a Taylor-type rule and a rule that determines the rate of nominal depreciation. The 2 'corner' regimes, in which only one policy rule is used, are particular cases. The model is calibrated and implemented in Dynare for simple and optimal simple policy rules, and optimal policy under commitment. Numerical losses are obtained for ad-hoc loss functions for different sets of central bank preferences. The results show that the losses are lower when both policy rules are used. This is due to the central bank's enhanced ability, when it uses the two policy rules, to influence private capital flows through the effects of its actions on the endogenous risk premium in the risk-adjusted uncovered interest parity equation.

Suggested Citation

  • Escudé, Guillermo J., 2013. "A DSGE model for a SOE with systematic interest and foreign exchange policies in which policymakers exploit the risk premium for stabilization purposes," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 7, pages 1-110.
  • Handle: RePEc:zbw:ifweej:201330
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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2013-30
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    Cited by:

    1. Escudé, Guillermo J., 2014. "The possible trinity: Optimal interest rate, exchange rate, and taxes on capital flows in a DSGE model for a small open economy," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-58.
    2. Andrey G. Shulgin, 2015. "Monetary Regime Choice and Optimal Credit Rationing at the Official Rate: The Case of Russia," HSE Working papers WP BRP 103/EC/2015, National Research University Higher School of Economics.
    3. Shulgin, Andrei, 2014. "How much monetary policy rules do we need to estimate DSGE model for Russia?," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 36(4), pages 3-31.
    4. Shulgin, A., 2015. "Optimization of Simple Monetary Policy Rules on the Base of Estimated DSGE-model," Journal of the New Economic Association, New Economic Association, vol. 26(2), pages 64-98.
    5. repec:nea:journl:y:2017:i:33:p:75-115 is not listed on IDEAS

    More about this item

    Keywords

    DSGE models; small open economy; exchange rate policy; optimal policy;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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