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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- McCallum, Bennett T & Nelson, Edward, 2000.
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- Bennett T McCallum & Edward Nelson, 2001. "Monetary Policy for an Open Economy: An Alternative Framework with Optimising Agents and Sticky Prices," Discussion Papers 05, Monetary Policy Committee Unit, Bank of England.
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"Fear of floating,"
14000, University Library of Munich, Germany.
- Timothy Kam & Kirdan Lees & Philip Liu, 2009.
"Uncovering the Hit List for Small Inflation Targeters: A Bayesian Structural Analysis,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 41(4), pages 583-618, 06.
- Timothy Kam & Kirdan Lees & Philip Liu, 2006. "Uncovering The Hit-List For Small Inflation Targeters: A Bayesian Structural Analysis," ANU Working Papers in Economics and Econometrics 2006-473, Australian National University, College of Business and Economics, School of Economics.
- Timothy Kim & Kirdan Lees & Philip Liu, 2006. "Uncovering the Hit-list for Small Inflation Targeters: A Bayesian Structural Analysis," Reserve Bank of New Zealand Discussion Paper Series DP2006/09, Reserve Bank of New Zealand.
- Dennis, Richard & Leitemo, Kai & Söderström, Ulf, 2007.
"Monetary Policy in a Small Open Economy with a Preference for Robustness,"
CEPR Discussion Papers
6067, C.E.P.R. Discussion Papers.
- Richard Dennis & Kai Leitemo & Ulf Soderstrom, 2006. "Monetary Policy in a Small Open Economy with a Preference for Robustness," Working Papers 316, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Richard Dennis & Kai Leitemo & Ulf Söderström, 2007. "Monetary policy in a small open economy with a preference for robustness," Working Paper Series 2007-04, Federal Reserve Bank of San Francisco.
- 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.
- Alejandro Justiniano & Bruce Preston, 2009. "Monetary policy and uncertainty in an empirical small open economy model," Working Paper Series WP-09-21, Federal Reserve Bank of Chicago.
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