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Managing Macroeconomic Fluctuations with Flexible Exchange Rate Targeting

Jonas Heipertz, Ilian Mihov () and Ana Maria Santacreu

No 2017-28, 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 outperforms a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare. The differences between the rules are driven by: (i) the path of the nominal exchange rate and interest rate under each rule, and (ii) time variation in the risk premium, which leads to deviations from uncovered interest parity. These differences are larger in very open economies, more exposed to foreign shocks, and in which domestic and foreign goods are highly substitutable.

Keywords: Time-Varying Risk Premium; Exchange Rate Management; Welfare; Monetary Policy Rules (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Pages: 44
Date: 2017-10-01, Revised 2019-11-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2017-028

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DOI: 10.20955/wp.2017.028

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