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Optimal monetary policy with a regime-switching exchange rate in a forward-looking model

  • Fernando Alexandre

    (NIPE and niversidade do Minho)

  • Pedro Bação

    ()

    (GEMF and Faculdade de Economia, Universidade de Coimbra)

  • John Driffill

    ()

    (Birkbeck College, University of London)

We evaluate the macroeconomic performance of different monetary policy rules when there is exchange rate uncertainty. We do this in the context of a non-linear rational expectations model. The exchange rate is allowed to deviate from its fundamental value and the persistence of the deviation is modeled as a Markov switching process. Our results suggest that taking into account the switching nature of the economy is important only in extreme cases.

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File URL: http://gemf.fe.uc.pt/workingpapers/pdf/2007/gemf_2007-09.pdf
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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2007-09.

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Length: 54 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:gmf:wpaper:2007-09
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  24. Thomas Lubik & Frank Schorfheide, 2003. "Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation," Economics Working Paper Archive 505, The Johns Hopkins University,Department of Economics.
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  28. Tatiana Kirsanova & Campbell Leith & Simon Wren-Lewis, 2006. "Should Central Banks Target Consumer Prices or the Exchange Rate?," Economic Journal, Royal Economic Society, vol. 116(512), pages F208-F231, 06.
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