Simple Monetary Policy Rules and Exchange Rate Uncertainty

Kai Leitemo and Ulf Söderström ()

No 122, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We analyze the performance and robustness of some common simple rules for monetary policy in a New-Keynesian open economy model under different assumptions about the exchange rate model. Adding the exchange rate to an optimized Taylor rule gives only small improvements in terms of economic stability in most model configurations. The Taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation. Our results thus indicate that the Taylor rule may be sufficient to stabilize a small open economy, also under exchange rate model uncertainty.

Keywords: Open economy; Exchange rate determination; Model uncertainty; Robustness of policy rules (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2001-06-01
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Published in Journal of International Money and Finance, 2005, pages 481-507.

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Related works:
Journal Article: Simple monetary policy rules and exchange rate uncertainty (2005)
Journal Article: Simple monetary policy rules and exchange rate uncertainty (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0122

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