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Real exchange rate persistence and systematic monetary policy behaviour

  • Jan J J Groen
  • Akito Matsumoto

This paper estimates forward-looking monetary policy rules for Germany over the 1979-98 period and for the United Kingdom for the periods 1979-90 and 1992-98. The estimation results indicate that there were substantial differences between systematic monetary policy in Germany and in the United Kingdom, as well as shifts in systematic monetary policy in the United Kingdom, over this period. The paper analyses the implications of these estimated policy rules for real exchange rate behaviour in an open economy dynamic stochastic general equilibrium model. The analysis shows that real exchange rate persistence could be attributed to the persistence of real shocks and interest rate smoothing behaviour of central banks. However, the observed cross-country asymmetry in systematic monetary policy behaviour elevates real exchange rate persistence to realistic levels, whereas changes in asymmetric policy behaviour alter the character of real exchange rate persistence.

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Paper provided by Bank of England in its series Bank of England working papers with number 231.

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Date of creation: Oct 2004
Date of revision:
Handle: RePEc:boe:boeewp:231
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