Central Bank Learning, Terms of Trade Shocks & Currency Risks: Should Only Inflation Matter for Monetary Policy?
This paper examines the role of interest rate policy in a small open economy subject to terms of trade shocks, and time-varying currency risks. The private sector makes optimal decisions in an intertemporal non-linear setting with rational, forward-looking expectations. In contrast, the monetary authority practices "least-squares learning" about the evolution of inflation, output growth, and exchange rate depreciation in alternative policy scenarios. Interest rates are set by linear quadratic optimization, with the objectives for inflation, output growth, or depreciation depending on current conditions. The simulation results show that the prefered stance is one which targets inflation only. Including other targets such as growth and exchange rate changes significantly increases output variability, and unambiguously decreases welfare.
(This abstract was borrowed from another version of this item.)
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||01 Jul 2002|
|Contact details of provider:|| Web page: http://www.cepremap.cnrs.fr/sce2002.html/|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- den Haan, Wouter J & Marcet, Albert, 1990.
"Solving the Stochastic Growth Model by Parameterizing Expectations,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 8(1), pages 31-34, January.
- Wouter Denhaan & Albert Marcet, 1990. "FORTRAN code for Simulation Parameterized Expecations Algorithm," QM&RBC Codes 57, Quantitative Macroeconomics & Real Business Cycles.
- Thomas J. Sargent & Noah Williams & Tao Zha, 2006.
"The conquest of South American inflation,"
FRB Atlanta Working Paper
2006-20, Federal Reserve Bank of Atlanta.
- L.J. Christiano & C.J. Gust, 1999.
"Taylor Rules in a Limited Participation Model,"
DNB Staff Reports (discontinued)
33, Netherlands Central Bank.
- Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper Series WP-99-3, Federal Reserve Bank of Chicago.
- Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper 9902, Federal Reserve Bank of Cleveland.
- Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor Rules in a Limited Participation Model," NBER Working Papers 7017, National Bureau of Economic Research, Inc.
- Stephanie Schmitt-Grohe & Martin Uribe, 2001.
"Closing Small Open Economy Models,"
Departmental Working Papers
200115, Rutgers University, Department of Economics.
- Duffy, John & McNelis, Paul D., 2001.
"Approximating and simulating the stochastic growth model: Parameterized expectations, neural networks, and the genetic algorithm,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 25(9), pages 1273-1303, September.
- Paul McNelis & John Duffy, 1998. "Approximating and Simulating the Stochastic Growth Model: Parameterized Expectations, Neural Networks, and the Genetic Algorithm," GE, Growth, Math methods 9804004, EconWPA, revised 04 May 1998.
- John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, Enero.
- Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
- Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf2:68. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.