Should the Exchange Rate be in a Monetary Policy Objective Function?

Monetary Policy, Exchange Rate Flexibility, and Exchange Rate Pass-Through

This paper develops a dynamic general-equilibrium (DGE) model of a small open economy to investigate alternative monetary rules, differing primarily in the degree to which they allow for exchange rate flexibility. A central argument of the paper is that the nature of the trade-off between fixed and floating exchange rates may be quite different in mature industrial economies than in emerging-ma...

Monetary policy and exchange rate overshooting in Iran: A Vector Errors Correction (VEC) approach

Assumption of exchange rate overshooting has significant position in international macroeconomic discussion. This phenomenon is one of the abnormal behaviors of exchange rate that happen in short run. Dornbusch (1976) shows that because speed of equilibrium prices is slow relative to asset markets and commodity prices are sticky in the short run, However, over time, commodity prices will rise a...

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 de...

Monetary policy and the exchange rate in Brazil∗

This note presents evidence that higher interest rates may render a country’s currency less attractive. Using data from the dates surrounding the monetary policy committee meetings in Brazil and the methodology of identification through heteroskedasticity we find that unexpected increases in interest rates caused the Brazilian currency to depreciate during the 2000-2006 period.

Appendix to : Monetary Policy Rules and the Exchange Rate