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

Author

Listed:
  • Fernando Alexandre

    (NIPE and niversidade do Minho)

  • Pedro Bação

    (GEMF and Faculdade de Economia, Universidade de Coimbra)

  • John Driffill

    (Birkbeck College, University of London)

Abstract

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.

Suggested Citation

  • Fernando Alexandre & Pedro Bação & John Driffill, 2007. "Optimal monetary policy with a regime-switching exchange rate in a forward-looking model," GEMF Working Papers 2007-09, GEMF, Faculty of Economics, University of Coimbra.
    • Handle: RePEc:gmf:wpaper:2007-09
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    References listed on IDEAS

    as
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    Cited by:

    1. Fernando Alexandre & Pedro Bação & Vasco Gabriel, 2008. "Taylor-type rules versus optimal policy in a Markov-switching economy," GEMF Working Papers 2008-02, GEMF, Faculty of Economics, University of Coimbra.

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    More about this item

    Keywords

    Exchange Rates; Monetary Policy; Markov Switching;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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