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: Monetary policy - Australia; Foreign exchange rates (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Economic Record, Vol. 79, pp. 20-38, March 2003

Downloads: (external link)
http://www.frbsf.org/economic-research/files/wp02-19bk.pdf (application/pdf)

Related works:
Journal Article: Exploring the Role of the Real Exchange Rate in Australian Monetary Policy (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2002-19

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().