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Should central banks react to exchange rate movements? An analysis of the robustness of simple policy rules under exchange rate uncertainty

  • Wollmershäuser, Timo

This paper evaluates the performance of simple policy rules in an open economy. By introducing a high degree of exchange rate uncertainty we find that policy rules with an important feedback from movements in the real exchange rate are very robust to uncertainty about the true exchange rate model. A closed economy rule performs badly in most exchange rate specifications. This is in contrast to the findings of many other studies. In our view, this result is due to the fact that these studies assume a known and reliable relationship between the exchange rate and the interest rate.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19716.

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Date of creation: 2006
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Publication status: Published in Journal of Macroeconomics 3 28(2006): pp. 493-519
Handle: RePEc:lmu:muenar:19716
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