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The real exchange rate in Taylor rules: A Re-Assessment

Richard T. Froyen and Alfred Guender ()

Economic Modelling, 2018, vol. 73, issue C, 140-151

Abstract: Examining alternative flexible inflation targeting strategies, we find that a small concern for real exchange rate stability as a policy goal matters. First, it warrants the inclusion of the real exchange rate in Taylor rules and, second, it is sufficient to improve the performance of Taylor rules relative to optimal policy. Gains are substantial because a small weight on real exchange rate fluctuations makes optimal policy less aggressive.

Keywords: CPI; Domestic inflation targeting; Taylor rules; Timeless perspective; Real exchange rate; E3; E5; F3 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:ecmode:v:73:y:2018:i:c:p:140-151