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Exchange Rate Management and Inflation Targeting: Modeling the Exchange Rate in Reduced-Form New Keynesian Models

Jaromír Beneš (), Jaromir Hurnik and David Vavra
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Jaromír Beneš: Reserve Bank of New Zealand,

Czech Journal of Economics and Finance (Finance a uver), 2008, vol. 58, issue 03-04, 166-194

Abstract: This paper introduces a strategy for modeling the exchange rate when the monetary authority targets inflation while also managing the exchange rate using interventions. It does so in the framework of a standard reduced-form New Keynesian model of monetary transmission used in many institutions for research, forecasting, and monetary policy analysis. We propose a microfounded modification to the UIP condition which allows for modeling of informal exchange rate bands. Our modeling strategy is useful for most hybrid IT regimes, including those with imperfect control over market interest rates.

Keywords: IT regimes; New Keynesian model; exchange rate; UIP (search for similar items in EconPapers)
JEL-codes: C51 E47 E52 (search for similar items in EconPapers)
Date: 2008
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Handle: RePEc:fau:fauart:v:58:y:2008:i:3-4:p:166-194