Country-Specific Risk Premium, Taylor Rules, and Exchange Rates

Barbara Annicchiarico () and Alessandro Piergallini ()

MPRA Paper from University Library of Munich, Germany

Abstract: The adoption of a Taylor-type monetary policy rule and an inflation target for emerging market economies that choose a flexible exchange rate regime is often advocated. This paper investigates the issue of exchange rate determination when interest-rate feedback rules are implemented in a continuous-time optimizing model of a small open economy facing an imperfect global capital market. It is demonstrated that when a risk premium on external debt affects the monetary policy transmission mechanism, the Taylor principle is not a necessary condition for determinacy of equilibrium. On the other hand, it is shown that exchange rate dynamics critically depends on whether monetary policy is active or passive.

Keywords: Risk Premium on Foreign Debt; Taylor Rules; Exchange Rate Dynamics. (search for similar items in EconPapers)
JEL-codes: F32 E52 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-mon and nep-opm
Date: 2009
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http://mpra.ub.uni-muenchen.de/13553/ orginal version
http://mpra.ub.uni-muenchen.de/13556/ revised version
http://mpra.ub.uni-muenchen.de/13557/ revised version

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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:13553

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