The Exchange Rate as an Instrument of Monetary Policy
Ilian Mihov and
Ana Maria Santacreu
Additional contact information
Ilian Mihov: INSEAD
No 2017-28, Working Papers from Federal Reserve Bank of St. Louis
Monetary policy research in small open economies has typically focused on “corner solutions”: either the currency rate is fixed by the central bank, or it is left to be determined by market forces. We build an open-economy model with external habits to study the properties of a new class of monetary policy rules in which the monetary authority uses the exchange rate as the instrument. Different from a Taylor rule, the monetary authority announces the rate of expected currency appreciation by taking into account inflation and output fluctuations. We find that the exchange rate rule outperforms a standard Taylor rule in terms of welfare, regardless of the policy parameter values. The differences are driven by: (i) the behavior of the nominal exchange rate and interest rates under each rule, and (ii) deviations from UIP due to a time-varying risk premium.
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://files.stlouisfed.org/files/htdocs/wp/2017/2017-028.pdf Full text (application/pdf)
https://doi.org/10.20955/wp.2017.028 https://doi.org/10.20955/wp.2017.028 (text/html)
Working Paper: The Exchange Rate as an Instrument of Monetary Policy (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2017-028
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Anna Oates ().