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Incomplete Exchange Rate Pass-Through and Simple Monetary Policy Rules

  • Adolfson, Malin

    ()

    (Dept. of Economics, Stockholm School of Economics)

The performance of various monetary rules is investigated in an open economy with incomplete exchange rate pass-through. Implementing monetary policy through an exchange-rate augmented policy rule does not improve social welfare compared to using an optimized Taylor rule, irrespective of the degree of pass-through. However, an indirect exchange rate response, through a policy reaction to Consumer Price Index (CPI) inflation rather than to domestic inflation, is welfare enhancing in all pass-through cases. This result is moreover independent of whether society values domestic or CPI inflation stabilization. The only case where a direct real exchange rate response is slightly welfare improving occurs when the other reaction coefficients, on inflation and output, are sub-optimal.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 478.

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Length: 30 pages
Date of creation: 31 Oct 2001
Date of revision:
Handle: RePEc:hhs:hastef:0478
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The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

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  1. Kai Leitemo & Ulf Soderstrom, 2001. "Simple monetary policy rules and exchange rate uncertainty," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. Adolfson, Malin, 2002. "Implications of Exchange Rate Objectives under Incomplete Exchange Rate Pass-Through," Working Paper Series 135, Sveriges Riksbank (Central Bank of Sweden).
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  26. Adolfson, Malin, 2001. "Optimal Monetary Policy Delegation under Incomplete Exchange Rate Pass-Through," SSE/EFI Working Paper Series in Economics and Finance 477, Stockholm School of Economics.
  27. Frank Smets & Raf Wouters, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Research 19, National Bank of Belgium.
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