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Real exchange rate persistence and systematic monetary policy behaviour

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  • Jan J J Groen
  • Akito Matsumoto

Abstract

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.

Suggested Citation

  • Jan J J Groen & Akito Matsumoto, 2004. "Real exchange rate persistence and systematic monetary policy behaviour," Bank of England working papers 231, Bank of England.
    • Handle: RePEc:boe:boeewp:231
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP231.pdf
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    2. Nelson C. Mark, 2009. "Changing Monetary Policy Rules, Learning, and Real Exchange Rate Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1047-1070, September.
    3. Gaglianone, Wagner Piazza & Marins, Jaqueline Terra Moura, 2017. "Evaluation of exchange rate point and density forecasts: An application to Brazil," International Journal of Forecasting, Elsevier, vol. 33(3), pages 707-728.
    4. Martínez-García, Enrique & Søndergaard, Jens, 2013. "Investment And Real Exchange Rates In Sticky Price Models," Macroeconomic Dynamics, Cambridge University Press, vol. 17(2), pages 195-234, March.
    5. Pietro Cova & Mr. Alessandro Rebucci & Mr. Akito Matsumoto & Massimiliano Pisani, 2008. "New Shocks, Exchange Rates and Equity Prices," IMF Working Papers 2008/284, International Monetary Fund.
    6. Jón Steinsson, 2008. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models," American Economic Review, American Economic Association, vol. 98(1), pages 519-533, March.
    7. Morales-Arias, Leonardo & Moura, Guilherme V., 2013. "Adaptive forecasting of exchange rates with panel data," International Journal of Forecasting, Elsevier, vol. 29(3), pages 493-509.
    8. Engel, Charles, 2019. "Real exchange rate convergence: The roles of price stickiness and monetary policy," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 21-32.
    9. Kamalyan, Hayk, 2023. "Real exchange rate dynamics in the New-Keynesian model," International Economics, Elsevier, vol. 174(C), pages 250-255.
    10. José Valentim Machado Vicente & Jaqueline Terra Moura Marins & Wagner Piazza Gaglianone, 2021. "Impacts of the Monetary Policy Committee Decisions on the Foreign Exchange Rate in Brazil," Working Papers Series 552, Central Bank of Brazil, Research Department.
    11. Molodtsova, Tanya & Papell, David H., 2009. "Out-of-sample exchange rate predictability with Taylor rule fundamentals," Journal of International Economics, Elsevier, vol. 77(2), pages 167-180, April.
    12. Ida Wolden Bache, 2008. "Assessing estimates of the exchange rate pass-through," Working Paper 2007/12, Norges Bank.
    13. Ida Wolden Bache, 2006. "Assessing the structural VAR approach to exchange rate pass-through," Computing in Economics and Finance 2006 309, Society for Computational Economics.
    14. Kamalyan, Hayk, 2020. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models: A Reassessment," MPRA Paper 107491, University Library of Munich, Germany.
    15. Wagner Piazza Gaglianone & Jaqueline Terra Moura Marins, 2014. "Risk Assessment of the Brazilian FX Rate," Working Papers Series 344, Central Bank of Brazil, Research Department.

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