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Monetary policy rules and foreign currency positions

  • De Paoli, Bianca

    ()

    (Bank of England)

  • Küçük-Tuğer, Hande

    ()

    (Centre for Economic Performance, London School of Economics)

  • Søndergaard, Jens

    ()

    (Fixed Income Research, Global Markets EMEA, Nomura International plc)

Using an endogenous portfolio choice model, this paper examines how different monetary policy regimes can lead to different foreign currency positions by changing the cyclical properties of the nominal exchange rate. We find that strict inflation-targeting regimes are associated with a short position in foreign currency, while the opposite is true for non inflation targeting regimes. We also explore how these different external positions affect the international transmission of monetary shocks through the valuation channel. When central banks follow inflation-targeting Taylor-type rules, valuation effects of monetary expansions are beggar-thy-self, but they are beggar-thy-neighbour in a money growth targeting regime (or when monetary policy puts weight on output stabilisation).

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Paper provided by Bank of England in its series Bank of England working papers with number 403.

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Length: 51 pages
Date of creation: 28 Oct 2010
Date of revision:
Handle: RePEc:boe:boeewp:0403
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  1. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel & Tille, Cedric, 2000. "Competitive devaluations: toward a welfare-based approach," Journal of International Economics, Elsevier, vol. 51(1), pages 217-241, June.
  2. Matthew Higgins & Thomas Klitgaard & Cédric Tille, 2006. "Borrowing without debt? Understanding the U.S. international investment position," Staff Reports 271, Federal Reserve Bank of New York.
  3. Jonathan Heathcote & Fabrizio Perri, 2007. "The International Diversification Puzzle Is Not As Bad As You Think," NBER Working Papers 13483, National Bureau of Economic Research, Inc.
  4. Astley, Mark & Giese, Julia & Hume, Michael & Kubelec, Chris, 2009. "Global imbalances and the financial crisis," Bank of England Quarterly Bulletin, Bank of England, vol. 49(3), pages 178-190.
  5. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2009. "International portfolios with supply, demand and redistributive shocks," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  6. Vincent Labhard & Gabriel Sterne & Chris Young, 2005. "Wealth and consumption: an assessment of the international evidence," Bank of England working papers 275, Bank of England.
  7. Bianca De Paoli, 2004. "Monetary Policy and Welfare in a Small Open Economy," CEP Discussion Papers dp0639, Centre for Economic Performance, LSE.
  8. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2009. "International portfolios, capital accumulation and foreign assets dynamics," Globalization and Monetary Policy Institute Working Paper 27, Federal Reserve Bank of Dallas.
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