Exploring the Role of the Real Exchange Rate in Australian Monetary Policy

Richard Dennis

No 2002-19, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: An important issue in small open-economies is whether policymakers should respond to exchange rate movements when they formulate monetary policy. Micro-founded models tend to suggest that there is little to be gained from responding to exchange rate movements, and the literature has largely concluded that such a response is unnecessary, or even undesirable (Taylor, 2001). This paper examines this issue using an estimated model of the Australian economy. In contrast to micro-founded models, according to this model policymakers should allow for movements in the real exchange rage and the terms-of-trade when they set interest rates. Further, taking real exchange rate movements into account appears even more important with price level targeting than with inflation targeting.

Keywords: real; exchange; rates (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 32
Date: 2002-06-01
Note: PDF date: This version June, 2002. First version October, 2000.
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Journal Article: Exploring the Role of the Real Exchange Rate in Australian Monetary Policy (2003)
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DOI: 10.24148/wp2002-19

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