Taylor rules, fear of floating and the role of the exchange rate in monetary policy: a case of observational equivalence
This paper considers the role of the exchange rate in monetary policy rules. It argues that much recent research aimed at determining the extent of concern for exchange rate stabilisation on the part of central banks is potentially flawed. If policy makers are subject to fear of floating – whereby they aim to stabilise exchange rates but without revealing this to the public – current estimated models cannot may provide insufficient information to determine policy objectives. In effect, several structural models may yield observationally equivalent interest rate rules. The paper uses two small open economy models to highlight this issue.
|Date of creation:||Jun 2012|
|Date of revision:||Jun 2012|
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2006-473, Australian National University, College of Business and Economics, School of Economics.
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Working Paper Series
WP-09-21, Federal Reserve Bank of Chicago.
- Alejandro Justiniano & Bruce Preston, 2010. "Monetary policy and uncertainty in an empirical small open-economy model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 93-128.
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