IDEAS home Printed from https://ideas.repec.org/p/nzb/nzbdps/2003-09.html
   My bibliography  Save this paper

Monetary policy and the volatility of real exchange rates in New Zealand

Author

Abstract

The relationship between interest rates and exchange rates is puzzling and poorly understood. But under some standard assumptions, interest rates can be adjusted to smooth real exchange rate movements at the possible price of increased volatility in other variables. Estimates made under some generous suppositions about what monetary policy is able to accomplish suggest that decreasing real exchange rate volatility by about 25 per cent would require increasing output volatility by about 10-15 per cent, inflation volatility by about 0-15 per cent and interest rate volatility by about 15-40 per cent.

Suggested Citation

  • Ken West, 2003. "Monetary policy and the volatility of real exchange rates in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/09, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2003/09
    as

    Download full text from publisher

    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2003/dp03-09.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
    2. 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.
    3. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February.
    4. David K. Backus, 2001. "Affine Term Structure Models and the Forward Premium Anomaly," Journal of Finance, American Finance Association, vol. 56(1), pages 279-304, February.
    5. Cheung, Yin-Wong & Chinn, Menzie D. & Pascual, Antonio Garcia, 2005. "Empirical exchange rate models of the nineties: Are any fit to survive?," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1150-1175, November.
    6. Aaron Drew & L Christopher Plantier, 2000. "Interest rate smoothing in New Zealand and other dollar bloc countries," Reserve Bank of New Zealand Discussion Paper Series DP2000/10, Reserve Bank of New Zealand.
    7. Pierre-Olivier Gourinchas & Aaron Tornell, 2000. "Exchange Rate Dynamics, Learning and Misperception," Econometric Society World Congress 2000 Contributed Papers 0795, Econometric Society.
    8. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    9. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
    10. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    11. Kollmann, Robert, 2002. "Monetary policy rules in the open economy: effects on welfare and business cycles," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 989-1015, July.
    12. 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.
    13. Angela Huang & Dimitri Margaritis & David Mayes, 2001. "Monetary Policy Rules in Practice: Evidence from New Zealand," Multinational Finance Journal, Multinational Finance Journal, vol. 5(3), pages 175-200, September.
    14. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hsing, Yu, 2009. "Analysis of the Behavior of the New Zealand Dollar Exchange Rate: Comparison of Four Major Models," Review of Applied Economics, Review of Applied Economics, vol. 5(1-2).
    2. Jesús Rodríguez López & Hugo Rodríguez Mendizábal, 2007. "The Optimal Degree of Exchange Rate Flexibility: a Target Zone Approach," Review of International Economics, Wiley Blackwell, vol. 15(4), pages 803-822, September.
    3. 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.
    4. Anella Munro, 2004. "What drives the New Zealand dollar?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, june.
    5. Divino, Jose Angelo, 2009. "Is there a case for domestic inflation target?," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(10), pages 3122-3135.
    6. Ágeir Daníelsson & Lúdvík Elíasson & Magnús F. Gudmundsson & Björn A. Hauksson & Ragnhildur Jónsdóttir & Thorvardur Tjörvi Ólafsson & Thórarinn G. Pétursson, 2006. "QMM A Quarterly Macroeconomic Model of the Icelandic Economy," Economics wp32, Department of Economics, Central bank of Iceland.
    7. Akhand Akhtar Hossain, 2015. "The Evolution of Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 14611.
    8. Wang, Jian, 2010. "Home bias, exchange rate disconnect, and optimal exchange rate policy," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 55-78, February.
    9. Juan Pablo Medina & Anella Munro & Claudio Soto, 2008. "What Drives the Current Account in Comodity Exporting Countries? The Cases of Chile and New Zealand," Central Banking, Analysis, and Economic Policies Book Series,in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt- (ed.), Current Account and External Financing, edition 1, volume 12, chapter 10, pages 369-434 Central Bank of Chile.
    10. Kirdan Lees, 2006. "What do robust policies look like for open economy inflation targeters?," Reserve Bank of New Zealand Discussion Paper Series DP2006/08, Reserve Bank of New Zealand.
    11. Kirdan Lees, 2003. "The stabilisation problem: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/08, Reserve Bank of New Zealand.
    12. Nils Björksten & Arthur Grimes & Özer Karagedikli & Christopher Plantier, 2004. "What can the Taylor rule tell us about a currency union between New Zealand and Australia?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/05, Reserve Bank of New Zealand.
    13. James Twaddle & David Hargreaves & Tim Hampton, 2006. "Other stabilisation objectives within an inflation targeting regime: Some stochastic simulation experiments," Reserve Bank of New Zealand Discussion Paper Series DP2006/04, Reserve Bank of New Zealand.

    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nzb:nzbdps:2003/09. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre). General contact details of provider: http://edirc.repec.org/data/rbngvnz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.