a simple framework for international monetary policy analysis abstract we study the international monetary policy design problem within an optimizing two country sticky price model where each country faces a short run tradeoff between output and inflation the model is sufficiently tractable to solve analytically we find that in the nash equilibrium the policy problem for each central bank is isomorphic to the one it would face if it were a closed economy gains from cooperation arise however that stem from the impact of foreign economic activity on the domestic marginal cost of production while under nash central banks need only adjust the interest rate in response to domestic inflation under cooperation they should respond to foreign inflation as well in either scenario flexible exchange rates are desirable

monetary policy and the sterling exchange rate this article introduces the three contributions to the feature which address issues raised by the sterling appreciation of 1996 97 and the subsequent prolonged overvaluation cobham discusses the mpc s understanding of exchange rate changes and examines policy makers responses to the proposal that policy should respond to exchange rate misalignments kirsanova leith and wren lewis construct a new open economy macroeconomics model with international risk sharing shocks in which the welfare function derived includes a term in the terms of trade gap allsopp kara and nelson investigate the exchange rate prices pass through and how imports should be modelled and draw out the policy implications

real exchange rates and time varying trade costs this paper re examines the empirical modeling of purchasing power parity ppp deviations in the presence of commodity market frictions first we show that a specific type of smooth transition models can closely approximate the functional form of the theoretical adjustment mechanism derived by dumas 1992 dynamic equilibrium and the real exchange rate in a spatially separated world review of financial studies 5 2153 180 for the case of constant as well as changing trade costs second we develop for the first time an empirical model of the real exchange rate which allows for changes in the degree of market integration by employing a long span of data on the dollar sterling real exchange rate and a micro founded proxy for trade frictions we provide novel evidence of a significant relationship between the persistence of the real exchange rate and the level of trade costs this finding suggests that both the difficulty of detecting ppp and the extend of rogoff s puzzle vary over time with the degree of trade restrictiveness finally we highlight policy repercussions of our results

determinacy and learnability of monetary policy rules in small open economies this paper evaluates under which conditions different taylor type rules lead to determinacy and expectational stability e stability of rational expectations equilibrium in a simple new keynesian small open economy model developed by gali and monacelli 2005 in particular we extend the bullard and mitra 2002 results of determinacy and e stability in a closed economy to this small open economy framework our results highlight an important link between the taylor principle and both determinacy and learnability of equilibrium in small open economies more importantly the degree of openness coupled with the nature of the policy rule adopted by the monetary authorities might change this link in important ways a key finding is that contrary to bullard and mitra expectations based rules that involve the cpi and or the nominal exchange rate limit the region of e stability and the taylor principle does not guarantee e stability we also show that some forms of managed exchange rate rules can help to alleviate problems of both indeterminacy and expectational instability yet these rules might not be desirable since they promote greater volatility in the economy

what to target inflation or exchange rate author affiliation shu lin shulin75 gmail comhaichun ye haichunye gmail com acknowledgment the authors would like to thank kent kimbrough and two anonymous referees for valuable comments 1 introductionone of the most important recent innovations in the conduct of monetary policy is inflation targeting in which a monetary authority makes public an estimated inflation rate or range and attempts to steer the actual inflation toward the target using monetary tools since its emergence in the early 1990s inflation targeting has certainly been gaining popularity over the last two decades by the end of 2006 27 countries among which 17 are developing countries had explicitly adopted this new monetary policy regime the emergence of inflation targeting has attracted substantial attention from both researchers and policymakers numerous studies have empirically evaluated the effects of adopting an explicit inflation targeting regime on a country s economic performance especially on inflation and growth while studies focusing on advanced industrial countries so far have yielded mixed results the evidence in developing countries seems to be more robust 1 batini kuttner and laxton 2005 goncalves and salles 2008 and lin and ye 2009 all find that inflation targeting significantly lowers inflation in developing countries where the credibility of the central bank has not yet been well established thus the credibility gain of adopting an explicit inflation targeting regime is substantial in addition capistran and ramos francia 2010 show that inflation targeting significantly lowers the dispersion of inflation expectations in developing countries two recent survey articles walsh 2009 and ball 2010 also concluded that inflation targeting has larger beneficial effects in developing countries than those in advanced industrial countries despite the success of inflation targeting in developing countries the more traditional exchange rate targeting framework still remains the dominant monetary policy regime in developing countries it is so popular that an influential study by calvo and reinhart 2002 finds an epidemic case of fear of floating in the developing world 2 furthermore similar to inflation targeting an exchange rate targeting regime especially a credibly enforced one is also viewed as an effective means to achieve price stability in developing countries because it serves as a nominal anchor by allowing a developing central bank to borrow credibility from a foreign monetary authority in a strict exchange rate targeting framework the targeting country s inflation rate should be equal to that of the country usually a low inflation rich country to which its exchange rate is pegged does an inflation targeting framework outperform an exchange rate targeting regime in achieving price stability in developing countries if so does this benefit come at a cost of slower growth these two important and policy related questions have not yet been examined in the literature a common feature of previous studies is that they all compare an inflation targeting regime with a very broad alternative namely a non inflation targeting regime while ignoring the substantial heterogeneity in the monetary policy regimes adopted by non inflation targeting countries a disadvantage of comparing inflation targeting with such a broad alternative is that the results may not be of direct use for policy choices the objective of this study therefore is to make the first attempt in the literature to conduct a direct empirical comparison of the emerging inflation targeting framework with the popular exchange rate targeting regime in developing countries in particular we compare the effects of these two monetary policy regimes on two key outcome variables inflation and economic growth our study is built upon three recent empirical works on the effects of inflation targeting in developing countries including batini kuttner and laxton 2005 goncalves and salles 2008 and lin and ye 2009 but we focus on directly comparing inflation targeting with exchange rate targeting

the harrod foreign trade multiplier and economic growth in asian countries the validity of the harrod foreign trade multiplier for 11 asian countries is tested the results obtained generally support thrilwall s specification of the multiplier this suggests in an open economy relevant economic management is the factor that manipulates the income elasticities of exports and imports

singular focus or multiple objectives what the data tell us about inflation targeting in latin america proquest denotes formulae omitted introductionin the last decade and a half several latin american countries have adopted inflation targeting as their monetary framework moving away from other intermediate targets such as monetary aggregates and allowing at least on paper more exchange rate flexibility while the literature so far has not delivered a clear verdict on the impact of inflation targeting on macro economic performance in general particularly in comparison to other mon etary frameworks that have faced the same global environment it is evident that countries that have adopted inflation targeting have generally succeeded both in stabilizing inflation at relatively low rates and in anchoring the public s expectations at levels near the target 1one recurring question that arises regarding the use of inflation targeting concerns the flexibility that policymakers need to implement it namely to what extent should exchange rate fluctuations or financial stability concerns also be incorporated into the policy of a central bank that aims at achiev ing a preannounced target for inflation this is particularly relevant given that such targeting relies critically on policy credibility and effective com munication with the public thus the perception that multiple and possibly conflicting objectives are being pursued might undermine such credibility thereby endangering the integrity of the policy regarding the exchange rate the question is whether inflation targeting can or should accommodate a certain degree of fear of floating calvo and reinhart 2002 that is a policy reaction directed at preventing or smooth ing out exchange rate fluctuations in the most narrow sense it is clear that central banks using inflation targeting should respond to these movements when via a pass through they are likely to be transmitted to inflation or inflationary expectations however beyond this pass through effect there is also a case for reacting to exchange rate movements as these could gen erate supply side effects through their impact on the prices of intermediate inputs they could also affect competitiveness and particularly in highly dollarized economies lead to balance sheet effects that feed into financial instability in fact there is evidence that countries using inflation targeting do react to exchange rate movements estimating a monetary reaction function for a panel of advanced and emerging economies during 1996 2011 munoz and schmidt hebbel 2012 find that the short term policy rate in countries both with and without inflation targeting known as it reacts to changes in the nominal exchange rate using a similar approach but focusing on emerging economies aizenman hutchinson and noy 2011 find that the policy rate reacts to changes in the real exchange rate particularly in commodity export ing countries note that it is not possible to determine from these studies whether there is a separate exchange rate objective at play as opposed to the exchange rate being treated as one more signal regarding future inflation ary pressures from a different perspective berganza and broto 2012 focus their attention directly on foreign exchange forex interventions by central banks consistent with the presumed greater exchange rate flexibility of it they find that exchange rates are indeed more volatile in inflation targeting countries than in countries that do not target inflation however forex inter vention is far from absent in the targeting countries and it is found to be effective in reducing exchange rate volatility on the second question whether financial stability concerns should be incorporated into an inflation targeting framework there is also a case for expanding the set of instruments at the disposal of policymakers making use of macroprudential tools such as dynamic provisioning countercyclical capital requirements and loan to value limits and even complementing these instruments with an explicit reaction of the policy rate to an appropriate financial stability indicator

money new keynesian macroeconomics and the business cycle abstract we show in this paper that the typical modern business cycle cannot be reduced to the real business cycles archetype a monopolistic competition model with price adjustment costs affected by technological and monetary shocks better mimics the economic fluctuations in two countries with very different cyclical properties namely france and the united states in our model monetary shocks are necessary to reproduce the standard deviation of output the money output correlation the labour productivity worked hours relative standard deviation the labour productivity worked hours correlation and the mark up output correlation with two independent shocks one real more specifically defined than the solow residual and one nominal the model gives an answer to some empirical puzzles which were left unexplained by traditional rbc models

on the international effects of inflation targeting abstract this study empirically examines the international effects of inflation targeting employing a variety of propensity score matching methods we find strong evidence that inflation targeting has significantly different impacts on exchange rate volatility and international reserves in different country groups it significantly increases real and nominal exchange rate stability and international reserves in developing countries but lowers them in industrial countries on average inflation targeting increases lowers reserves roughly by the size of 1 3 1 8 months of imports values in developing industrial countries the treatment effects on targeting countries current accounts are found to be insignificant in both country groups

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

simple monetary policy rules and exchange rate uncertainty abstract we analyze the performance and robustness of some common simple rules for monetary policy in a new keynesian open economy model under different assumptions about the exchange rate model adding the exchange rate to an optimized taylor rule that responds to cpi inflation gives only small improvements in terms of economic stability in most model configurations the taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation our results thus indicate that the taylor rule is sufficient to stabilize a small open economy also under exchange rate model uncertainty

financial market integration and macroeconomic volatility the process of financial market integration is modeled in an intertemporal general equilibrium framework as the elimination of trading frictions between financial markets in different countries goods markets are assumed to be imperfectly competitive and goods prices are subject to sluggish adjustment simulation experiments show that increasing financial market integration increases the volatility of a number of variables when shocks originate from the money market but decreases the volatility of most variables when shocks originate from real demand or supply copyright 1996 by the editors of the scandinavian journal of economics

the performance and robustness of simple monetary policy rules in models of the canadian economy in this report we evaluate several simple monetary policy rules in twelve private and public sector models of the canadian economy our results indicate that none of the simple policy rules we examined is robust to model uncertainty in that no single rule performs well in all models

the role of the exchange rate in monetary policy rules for a country that chooses not to permanently fix its exchange rate through a currency board or a common currency or some kind of dollarization the only alternative monetary policy that can work well in the long run is one based on the trinity of i a flexible exchange rate ii an inflation target and iii a monetary policy rule while not often put into this threepart format the desirability of such a monetary policy in an open economy is in my view the clear implication of three corresponding strands of recent monetary research i research on fixed exchange rates regimes including the influential 1995 article the mirage of fixed exchange rates by maurice obstfeld and kenneth rogoff and the many analyses of the breakdown of fixed exchange rate regimes in the late 1990 s ii research on the practical success with inflation targeting by ben bernanke et al 1999 and iii research on the benefits of simple monetary policy rules see e g taylor 1999a this clear policy implication however does not end the debate about how exchange rates should be taken into account in formulating monetary policy even if one excludes capital controls and sterilized exchange market intervention from consideration because they are not effective or attractive ways to de link exchangerate movements from the domestic interest rate a crucial question remains how should the instruments of monetary policy the interest rate or a monetary aggregate react to the exchange rate should policymakers avoid any reaction and focus instead on domestic indicators such as inflation and real gdp or is the rule of thumb that a substantial appreciation of the real exchange rate furnishes a prima facie case for relaxing monetary policy as characterized by obstfeld and rogoff 1995 p 93 a better monetary policy rule or perhaps policymakers should heed the obstfeld rogoff warning that substantial departures from ppp purchasing power parity in the short run and even over decades make such a policy reaction to the exchange rate undesirable more generally if one accepts the trinity concept of monetary policy in an open economy then what is the role of the exchange rate in the monetarypolicy rule

the role of exchange rate in inflation targeting the case of turkey the role of the exchange rates in emerging market economies that have adopted inflation targeting it is a critical and contentious issue in the relevant literature this article investigates whet

how the ecb and the us fed set interest rates monetary policies of the european central bank ecb and us fed can be characterized by taylor rules that is both central banks seem to be setting rates by taking into account the output gap and inflation we also set up and tested taylor rules which incorporate money growth and the euro dollar exchange rate thereby improving the fit between actual and taylor rule based rates in general taylor rules appear to be a much better way of describing fed policy than ecb policy simulations suggest that the ecb s short term interest rates have been at a much lower level in the last 2 years compared with what a taylor rule would suggest

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

how much should inflation targeters care about the exchange rate abstract a dsge model is used to examine whether including the exchange rate in the central bank s policy rule can improve economic performance smoothing the exchange rate helps both financially robust economies and financially vulnerable emerging economies in handling risk premium shocks and given a small weight placed on the exchange rate the effects on inflation and output volatility are minimal with demand and cost push shocks financially vulnerable economies are especially likely to benefit from exchange rate smoothing due to perverse movements of the exchange rate they experience when hit by demand shocks and being more prone to risk premium shocks

anticipated versus unanticipated terms of trade shocks and the j curve phenomenon abstract using a dynamic stochastic general equilibrium dsge model we examine the impact of anticipated and unanticipated terms of trade tot shocks on aggregate output inflation and the trade balance tb this allows us to offer an alternative explanation of the j curve phenomenon we find that an unanticipated tot shock increases real output as well as inflation but the j curve phenomenon may not exist under a certain condition however under the same condition an anticipated tot shock leads to the j curve effect we find that our main result concerning the j curve phenomenon continues to hold even if the assumption of rational expectations about the tot is relaxed further analysis reveals that the presence of a cost channel of monetary policy increases the intensity of the j curve effect assuming plausible parameter values while using a more general model calibration results support our theoretical predictions

how do exchange rates co move a study on the currencies of five inflation targeting countries abstract this paper does three things first it explores the type of asymmetry in exchange rate correlation for five inflation targeting countries we show their currencies co move more closely with the currencies of some influential foreign countries during joint appreciations than joint depreciations against a world currency second it establishes empirically the linkage between interest rate differentials and exchange rate correlation we find evidence that both widening and narrowing interest rate differentials will reduce the correlation third it proposes a new version of the asymmetric dynamic conditional correlation model the model proves to be capable of providing great insight into the two issues investigated

home bias exchange rate disconnect and optimal exchange rate policy abstract this paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations the paper first demonstrates in a two country dynamic stochastic general equilibrium dsge model that home bias in consumption is important to replicate the exchange rate volatility and exchange rate disconnect documented in the data when home bias is high the shock to uncovered interest rate parity uip can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables such as gdp almost untouched the model predicts that the volatility of the real exchange rate relative to that of gdp increases with the extent of home bias this relation is supported by the data a second order accurate solution method is employed to find the optimal operational monetary policy rule our model suggests that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations in particular when the central bank does not take a strong stance against the inflation rate exchange rate stabilization may induce substantial welfare loss the model does not detect welfare gain from international monetary cooperation which extends obstfeld and rogoff s obstfeld m rogoff k 2002 global implications of self oriented national monetary rules quarterly journal of economics may 503 535 findings to a dsge model

globalisation pass through and the optimal policy response to exchange rates abstract in this paper we examine how monetary policy should respond to nominal exchange rates in a new keynesian open economy model that allows for a non trivial role for sterilised intervention the paper develops the argument against the backdrop of the evolving policy making environment of asian economies sterilised intervention can be a potent tool that offers policymakers an additional degree of freedom in maximising global welfare we show that the gains to sterilised intervention are greater when goods market integration is low and exchange rate pass through is high however increased financial internationalisation reduces the effectiveness of sterilised intervention as the international policy trilemma becomes more relevant unsterilised intervention may also have a role to play although the potential welfare gains from this are generally smaller most central banks in asia have actively used sterilised foreign exchange intervention as a policy tool to smooth exchange rates but over time declining exchange rate pass through and the increasing international integration of financial and goods markets will tend to reduce the efficacy of sterilised intervention given the limited effectiveness of unsterilised intervention our model implies that the role of exchange rate movements in the optimal setting of monetary policy in asia is decreasing

monetary policy in the uk the authors argue that the institutional dimension of the bank of england monetary policy and the role the uk hm treasury assumes in this framework are both firmly based on the new consensus in macroeconomics ncm this is also the theoretical framework upon which the inflation targeting element of monetary policy is firmly based this paper discusses these aspects of uk monetary policy and then assesses the policy that has been pursued since 1997 with some reference made to the period between 1992 and 1997 when a version of the framework was introduced the strategy has been successful in terms of keeping uk inflation rates within the targets set by hm treasury however a number of problematic issues are highlighted and discussed

do central banks respond to exchange rate movements some new evidence from structural estimation l auteure etudie l incidence des mouvements du taux de change sur la conduite de la politique monetaire en australie au canada en nouvelle zelande et au royaume uni elle elabore et estime un modele structurel d equilibre general a deux secteurs dans lequel les prix et les salaires sont rigides et les variations du taux de change se repercutent de facon limitee

borders and nominal exchange rates in risk sharing models of risk sharing predict that relative consumption growth rates are positively related to changes in real exchange rates we investigate this hypothesis using a new multicountry and multiregional data set within countries we find evidence for risk sharing episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation across countries however the association is reversed relative consumption and real exchange rates are negatively correlated we define this reversal as a border effect we find the border effect and show that it accounts for over half of the deviations from full risk sharing since cross border real exchange rates involve different currencies it is natural to ask how much of the border effect is accounted for by movements in exchange rates our measures indicate that a large part of the border effect comes from nominal exchange rate fluctuations we develop a simple open economy model that is consistent with the importance of nominal exchange rate variability in accounting for deviations from cross country risk sharing

monetary policy rules for an open economy the most popular simple rule for the interest rate due to taylor 1993a is meant to inform monetary policy in economies that are closed on the other hand its main open economy alternative i e ball s 1999 rule based on a monetary conditions index mci may perform poorly in the face of specific types of exchange rate shocks and thus cannot offer guidance for the day to day conduct of monetary policy in this paper we specify and evaluate a comprehensive set of simple monetary policy rules that are suitable for small open economies in general and for the united kingdom in particular we do so by examining the performance of a battery of simple rules including the familiar taylor rule and mci based rules a la ball this entails comparing the asymptotic properties of a two sector open economy dynamic stochastic general equilibrium model calibrated on united kingdom data under different rules we find that an inflation forecast based rule ifb i e a rule that reacts to deviations of expected inflation from target is a good simple rule in this respect when the horizon is adequately chosen adding a separate response to the level of the real exchange rate contemporaneous and lagged appears to reduce the difference in adjustment between output gaps in the two sectors of the economy but the improvement is only marginal importantly an ifb rule with or without exchange rate adjustment appears robust to different shocks in contrast to naive or ball s mci based rules

do real balance effects invalidate the taylor principle in closed and open economies this paper examines the determinacy implications of forecast based monetary policy rules that set the interest rate in response to expected future inflation in a neo wicksellian model that incorporates real balance effects we show that the presence of such effects in closed economies restricts the ability of the taylor principle to prevent indeterminacy of the rational expectations equilibrium the problem is exacerbated in open economies particularly if the policy rule reacts to consumer price rather than domestic price inflation however determinacy can be restored in both closed and open economies with the addition of monetary policy inertia

a comparison of optimal policy rules prior to and during inflation targeting empirical evidence from bank of canada abstractwe examine policy rules that are consistent with inflation targeting it framework in a small macroeconomic model of the canadian economy we set up an optimal linear regulator problem and derive policy rules to compare the dynamics of pre it and it eras we find that while the optimal monetary policy rule in the pre it period is best described with a loss function that attaches equal weight to price stability financial stability and output stability the it era is dominated by the price stability objective followed by the financial stability and output stability consecutively moreover we do not find an explicit role for exchange rate stability in the objective function of the bank of canada for both monetary policy eras we then compare the properties of the derived optimal rules with those of an ad hoc taylor rule for the it period in response to inflationary shocks taylor rule brings down inflation rates more quickly compared to the derived policy rules but at the cost of a higher sac

implicit asymmetric exchange rate peg under inflation targeting regimes the case of turkey especially after the 2000s many developing countries let exchange rates float and began implementing inflation targeting regimes based on mainly manipulation of expectations and aggregate demand however most developing countries implementing inflation targeting regimes experienced considerable appreciation trends in their currencies might have exchange rates been utilized as implicit tools even under inflation targeting regimes in developing countries to answer this question and investigate the determinants of inflation under an inflation targeting regime as a case study this paper analyzes the turkish experience with the inflation targeting regime between 2002 and 2008 there are two main findings of this paper first the evidence from a vector autoregressive var model suggests that the main determinants of inflation in turkey during this period are supply side factors such as international commodity prices and the variation in exchange rate rather than demand side factors since the turkish lira tl was considerably over appreciated during this period it is apparent that the turkish central bank benefited from the appreciation of the tl in its fight against inflation during this period second our findings suggest that the appreciation of the tl is related to the deliberate asymmetric policy stance of the bank with respect to the exchange rate both the econometric analysis from a var model and descriptive statistics indicate that appreciation of the turkish lira was tolerated during the period under investigation whereas depreciation was responded aggressively by the bank we call this policy stance under the inflation targeting regimes as implicit asymmetric exchange rate peg the turkish experience indicates that as opposed to rhetoric of central banks in developing countries inflation targeting developing countries may have an asymeyric stance toward exchange rates and favour appreciation of their currencies to hit their inflation targets in this sense it seems to contribute to the ignorance of dangers regarding to over appreciation of currencies in developing countries

monetary policy and exchange rate overshooting dornbusch was right after all abstract dornbusch s exchange rate overshooting hypothesis is a central building block in international macroeconomics yet empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting this puzzling result has been viewed by some researchers as a stylized fact to be reckoned with in policy modelling however many of these studies in particular those using vector autoregressive vars approaches have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restrictions on them in contrast we achieve identification by imposing a long run neutrality restriction on the real exchange rate thereby allowing for contemporaneous interaction between the interest rate and the exchange rate in a study of four open economies we find that the puzzles disappear in particular a contractionary monetary policy shock has a strong effect on the exchange rate which appreciates on impact the maximum effect occurs within 1 2 quarters and the exchange rate thereafter gradually depreciates to baseline consistent with the dornbusch overshooting hypothesis and with few exceptions consistent with uncovered interest parity uip

the robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the european central bank abstract this paper examines the implications of recent research on monetary policy rules for practical monetary policy making with special emphasis on strategies for setting interest rates by the european central bank ecb the paper draws on recent research and new simulations of a large open economy model to assess the efficiency of a simple benchmark rule in comparison with other proposed rules further it stresses new results on the robustness of monetary policy rules in which each rule that is optimal or good according to one model or researcher is tested for robustness by other researchers using different models because of the large increase in the number of economists focussing on econometric evaluation of monetary policy rules for the interest rate instrument and because of the parallel increase in the variety of models being developed for this purpose much more evidence is becoming available on the robustness of simple monetary policy rules for the interest rate than ever before

incomplete exchange rate pass through and simple monetary policy rules abstract this paper investigates the performance of various monetary policy rules in an open economy with incomplete exchange rate pass through implementing monetary policy through an exchange rate augmented policy rule does not improve social welfare compared to using an optimized taylor rule irrespective of the degree of pass through a direct exchange rate response improves welfare only if the other reaction coefficients on inflation and output are sub optimal however an indirect exchange rate response through a policy reaction to consumer price index cpi inflation rather than to domestic inflation is welfare enhancing this result is independent of whether society values domestic or cpi inflation stabilization

inflation targeting and exchange rate management in less developed countries abstract we analyze coordination of monetary and exchange rate policy in a two sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets our central finding is that tight management of the exchange rate greatly enhances the efficacy of inflation targeting in a flexible exchange rate system inflation targeting incurs a high risk of indeterminacy moreover small inflation shocks may escalate into much larger increases in inflation ex post both problems disappear when the central bank fixes the path of the nominal exchange rate or leans heavily against the wind in a managed float

a stable international monetary system emerges inflation targeting is bretton woods reversed a stable international monetary system has emerged since the early 1990s a large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks these countries place few restrictions on capital mobility and allow their exchange rates to float the domestic focus of monetary policy in these countries does not have any obvious international cost inflation targeters have lower exchange rate volatility and less frequent sudden stops of capital flows than similar countries that do not target inflation inflation targeting countries also do not have current accounts or international reserves that look different from other countries this system was not planned and does not rely on international coordination there is no role for a center country the imf or gold it is durable in contrast to other monetary regimes no country has been forced to abandon an inflation targeting regime succinctly it is the diametric opposite of the post war system bretton woods reversed

the dependence structure between the canadian stock market and the usd cad exchange rate a copula approach this paper investigates the dependence structure between the real canadian stock returns and the real usd cad exchange rate returns using the symmetrized joe clayton sjc copula function we estimate the sjc copula with monthly data over the period 1995 1 to 2006 12 our results show significant asymmetric static and dynamic tail dependence between the real stock returns and the real exchange rate returns such that the two returns are more dependent in the left than in the right tail of their joint distribution we explain this asymmetric dependence in terms of an asymmetric interest rate policy by canadian monetary authorities in response to changes in the real exchange rate during sub periods of falling and rising commodity prices le texte analyse la structure de dependance entre les rendements reels sur les actions canadiennes en bourse et les taux de rendements reels sur le taux de change entre le canada et les etats unis en utilisant la fonction a copule symetrisee joe clayton sjc on calibre cette fonction a l aide de donnees mensuelles pour la periode allant de 1995 1 a 2006 12 les resultats montrent une dependance asymetrique statique et dynamique significative entre les rendements reels sur les actions et les taux de rendements reels sur le taux de change telle que les deux rendements reels sont davantage dependants l un de l autre a l extremite gauche qu a l extremite droite de leur distribution conjointe on explique cette dependance asymetrique en termes d une politique asymetrique du taux d interet par les autorites canadiennes en reponse aux changements dans le taux de change reel durant les sous periodes de prix croissants et decroissants des denrees

explicit and implicit targets in open economies under a flexible inflation targeting regime should policymakers avoid any reaction to movements in the foreign exchange market using data for six advanced open economies explicitly targeting inflation this article examines empirically whether real exchange rate disequilibria systematically affect the conduct of monetary policy estimates indicate that monetary policy responses in inflation targeting open economies have changed significantly as the institutional framework for the conduct of monetary policy has evolved in particular an explicit target for core inflation and a greater use of the expectation channel of monetary policy appear to be the key features of the newest policy framework in this context central banks are unlikely to react to regular fluctuations in the exchange rate

structural changes in the time series of food prices and volatility measurement volatility in product prices is of considerable interest in the food and agricultural policy arena standard deviation sd type of measures including variance and the coefficient of variation have been commonly used for estimating realized volatility these methods are relatively simple to calculate and focus on the width of the data despite these merits they have a shortcoming in that the statistics can be amplified when the time series is nonstationary this study suggests a new way to measure price variation the structural breaks in the unconditional mean of a time series are determined and then the conventional sd type of measures for each regime are calculated this method addresses the weak point of the sd type of measure and is a competitive alternative to the conditional variance type or the trend deviation type of measures when the time series at comparison have notably different data generating processes or have nonstationarity

perils of unconventional monetary policy abstract unconventional monetary policy by relaxing restrictions on the composition of the balance sheet of the central bank compromises control over the stochastic path of inflation or in open economies over the stochastic path of exchange rates if the composition of the balance sheet is unrestricted then the path of inflation is indeterminate this is the case under pure quantitative easing where the target is the size of real money balances in contrast credit easing policies restrict the composition of the portfolio by targeting a specific expansion in the maturity profile of bonds bought and thus can implement a determinate path of inflation the composition of the portfolios traded by monetary fiscal authorities also determines premia in asset and currency markets

interest rate rules and transitional dynamics in an endogenously growing open economy abstract this paper sets up an endogenous growth model of an open economy in which the monetary authority implements a gradualist interest rate rule with targets for both inflation and economic growth we show that under a passive rule a monetary equilibrium exists and is unique moreover the equilibrium is locally determinate by contrast an active rule implies either two equilibria one high growth and one low growth or none in the case of two equilibria the high growth equilibrium is locally determinate while the low growth equilibrium is a source besides the stabilization and growth effects of alternative target policies are also explored in this study moreover in departing from the existing literature we turn to focus on the analysis of transition with a particular emphasis on the case of imperfect credibility

asymmetric volatility connectedness on the forex market abstract we show how bad and good volatility propagate through the forex market i e we provide evidence for asymmetric volatility connectedness on the forex market using high frequency intra day data of the most actively traded currencies over 2007 2015 we document the dominating asymmetries in spillovers that are due to bad rather than good volatility we also show that negative spillovers are chiefly tied to the dragging sovereign debt crisis in europe while positive spillovers are correlated with the subprime crisis different monetary policies among key world central banks and developments on commodities markets it seems that a combination of monetary and real economy events is behind the positive asymmetries in volatility spillovers while fiscal factors are linked with negative spillovers

structural changes cointegration and the empirics of thirlwall s law thirlwall s law establishes a relation between the long run growth rate the growth of exports and the long run income elasticity of imports the estimation of this parameter requires cointegration techniques which in turn require a large span of data thus exposing the estimates to risks of structural changes while this problem has been recognized in the literature the evidence produced is still partial being concerned with a very limited number of countries and in some respects unsatisfactory in this article we fill this gap by assessing thirlwall s empirical regularity on a sample of 22 organization for economic cooperation and development oecd countries using econometric techniques that allow for the presence of a shift of unknown date in the long run parameters the results are generally supportive of thirlwall s hypothesis and allow us to reconcile and qualify the evidence provided in the existing literature

monetary policy rules in theory and in practice evidence from the uk and the us given the large amount of interaction between research on monetary policy and its practice this article examines whether some simple monetary policy rules that have been proposed in the academic literature part of which has originated from within central banks provide a reasonable characterization of actual policy in the united kingdom and the united states the article finds the simple rule that describes best the actual us monetary policy is a speed limit rule with dynamics whilst for the uk it is a forward looking rule the simpler dynamics in the uk s monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting

does trade openness matter for aggregate instability abstract this paper presents a cash in advance model of a small open economy and shows that whether an inflation targeting interest rate rule introduces aggregate instability depends in general on the degree of openness to international trade this result emerges regardless of whether prices are sticky or flexible in a closed economy as the monetary authority responds to movements in inflation the resulting changes in interest rates affect aggregate consumption through an intertemporal substitution effect and an inflation tax effect in a small open economy this policy also induces changes in the terms of trade which depending on the degree of openness can generate counteracting effects on consumption as a consequence the implications of interest rate rules on macroeconomic stability in an open economy differ from those in a closed economy

the effects of monetary policy on unemployment dynamics under model uncertainty evidence from the united states and the euro area this paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule based monetary policy on unemployment dynamics in the euro area and the united states we employ a bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy we find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions moreover monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism finally we show that a policymaker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism but also about the differences between the euro area and the united states which are on average essentially small

thirlwall and balance of payments constrained growth this paper outlines the theory which thirlwall uses to determine the growth of domestic income and argues that crucial elements of this theory appear to be very weak the empirical evidence presented by thirlwall to support his argument for balance of payments constrained growth is considered