Optimal monetary policy under heterogeneity in currency trade

Mikael Bask

No 21/2007, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: We embed an expectations-based optimal policy rule into a DSGE model for a small open economy that is augmented with trend extrapolation or chartism, which is a form of technical trading, in currency trade to examine the prerequisites for monetary policy. We find that a unique REE that is least-squares learnable is often the outcome when there is a limited amount of trend extrapolation, but that a less flexible inflation rate targeting may cause a multiplicity of REE. We also compute impulse-response functions for key macroeconomic variables to study how the economy returns to steady state after being hit by a shock.

Keywords: determinacy; DSGE model; least-squares learning; targeting rule; technical trading; monetary policy (search for similar items in EconPapers)
JEL-codes: C62 E52 F31 F41 (search for similar items in EconPapers)
Date: 2007
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Journal Article: Optimal monetary policy under heterogeneity in currency trade (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2007_021

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