Monetary policy rules and foreign currency positions

Bianca De Paoli, Hande Küçük-Tuger and Jens Søndergaard

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Using an endogenous portfolio choice model, this paper examines how different monetary policy regimes can lead to different foreign currency positions by changing the cyclical properties of the nominal exchange rate. We find that strict inflation targeting regimes are associated with a short position in foreign currency, while the opposite is true for noninflation targeting regimes. We also explore how these different external positions affect the international transmission of monetary shocks through the valuation channel. When central banks follow inflation targeting Taylor-type rules, valuation effects of monetary expansions are beggar-thy-self, but they are beggar-thy-neighbour in a money growth targeting regime (or when monetary policy puts weight on output stabilization).

Keywords: portfolio choice; international transmission of shocks; monetary policy (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2010-11-01
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121699

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