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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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  11. Wollmershauser, Timo, 2006. "Should central banks react to exchange rate movements? An analysis of the robustness of simple policy rules under exchange rate uncertainty," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 493-519, September.
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  20. Simon Gilchrist & Masashi Saito, 2008. "Expectations, Asset Prices, and Monetary Policy: The Role of Learning," NBER Chapters, in: Asset Prices and Monetary Policy, pages 45-102 National Bureau of Economic Research, Inc.
  21. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
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  23. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April.
  24. Bordo, Michael D & Jeanne, Olivier, 2002. "Boom-Busts in Asset Prices, Economic Instability and Monetary Policy," CEPR Discussion Papers 3398, C.E.P.R. Discussion Papers.
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