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Implications of Exchange Rate Objectives under Incomplete Exchange Rate Pass-Through

  • Adolfson, Malin

    ()

    (Research Department, Central Bank of Sweden)

This paper analyzes the central bank’s optimal objective function in a small open economy model allowing for incomplete exchange rate pass-through. The results indicate that there are welfare gains from different types of monetary policy inertia. The welfare improvements of exchange rate stabilization are, however, dependent on the degree of discretionary stabilization bias. If the stabilization bias has been mitigated through a low weight on output stabilization social welfare can not be improved by inclusion of an explicit exchange rate term in the delegated objective function, irrespective of the degree of pass-through. Welfare can, though, be enhanced by appointing a central banker with greater preference for interest rate smoothing than that of society. The optimal degree of interest rate smoothing is increasing in the degree of pass-through.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 135.

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Length: 41 pages
Date of creation: 20 Jun 2002
Date of revision:
Handle: RePEc:hhs:rbnkwp:0135
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
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  1. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  2. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  3. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  4. Malin Adolfson, 1997. "Exchange rate pass-through to Swedish import prices," Finnish Economic Papers, Finnish Economic Association, vol. 10(2), pages 81-98, Autumn.
  5. Adolfson, Malin, 2001. "Monetary Policy with Incomplete Exchange Rate Pass-Through," SSE/EFI Working Paper Series in Economics and Finance 476, Stockholm School of Economics.
  6. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Price Stability as a Nash Equilibrium in Monetary Open-Economy Models," CEPR Discussion Papers 2757, C.E.P.R. Discussion Papers.
  7. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  8. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  9. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
  10. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  11. 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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