Taylor rules and the Canadian-US equilibrium exchange rate

Tino Berger, Bernd Kempa and -
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Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper identifies the Canadian-US equilibrium exchange rate based on a simple structural model of the real exchange rate, in which monetary policy follows a Taylor rule interest rate reaction function. The equilibrium exchange rate is explained by relative output and inflation as observable variables, and by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974- 2008 we jointly estimate the unobserved components and the structural parameters using the Kalman filter and Bayesian technique. We find that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate, resulting in few but prolonged periods of currency misalignments.

Keywords: equilibrium exchange rate; unobserved components; Kalman filter; Bayesian analysis; Importance sampling (search for similar items in EconPapers)
Pages: 28 pages
Date: 2010-02
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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http://wps-feb.ugent.be/Papers/wp_10_643.pdf (application/pdf)

Related works:
Journal Article: Taylor rules and the Canadian–US equilibrium exchange rate (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:10/643

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