Managing Macroeconomic Fluctuations with Flexible Exchange Rate Targeting

Jonas Heipertz, Ilian Mihov and Ana Maria Santacreu

No 2017-028, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We show that a monetary policy rule that uses the exchange rate to stabilize the economy can outperform a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare. The differences between the rules are driven by: (i) the paths of the nominal exchange rate and the interest rate under each rule and (ii) external habits in consumption, which leads to deviations from uncovered interest parity. These differences are larger in economies, which are very open, which are more exposed to foreign shocks, or in which domestic and foreign goods are highly substitutable.

Keywords: Monetary Policy Rules; Exchange Rate Management; Time-Varying Risk Premium; Welfare (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2017-10-01, Revised 2022-01-16
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
Note: Publisher DOI: https://doi.org/10.1016/j.jedc.2022.104311
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Published in Journal of Economic Dynamics and Control

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Journal Article: Managing macroeconomic fluctuations with flexible exchange rate targeting (2022)
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DOI: 10.20955/wp.2017.028

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