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Taylor Rules and the Deutschmark-Dollar Real Exchange Rate

  • Charles Engel
  • Kenneth D. West

We explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate. The interest rate rule, in conjunction with some standard assumptions, implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials. The weights are functions of the parameters of the interest rate rule. An initial look at German data yields some support for the model.

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File URL: http://www.nber.org/papers/w10995.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10995.

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Date of creation: Dec 2004
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Publication status: published as Engel, Charles & West, Kenneth D., 2006. "Taylor Rules and the Deutschmark: Dollar Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1175-1194, August.
Handle: RePEc:nbr:nberwo:10995
Note: IFM ME
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  20. Kim, Soyoung, 2002. "Exchange rate stabilization in the ERM: identifying European monetary policy reactions," Journal of International Money and Finance, Elsevier, vol. 21(3), pages 413-434, June.
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