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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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  2. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
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  9. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
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  14. Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2010. "Minimal State Variable Solutions to Markov-switching Rational Expectations Models," Emory Economics 1003, Department of Economics, Emory University (Atlanta).
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  24. Alexandre, Fernando & Bacao, Pedro, 2005. "Monetary policy, asset prices, and uncertainty," Economics Letters, Elsevier, vol. 86(1), pages 37-42, January.
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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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