Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation

Thomas Lubik and Frank Schorfheide

Economics Working Paper Archive from The Johns Hopkins University,Department of Economics

Abstract: We estimate a small-scale, structural general equilibrium model of a small open economy using Bayesian methods. Our main focus is the conduct of monetary policy in Australia, Canada, New Zealand and the U.K., as measured by nominal interest rate rules. We consider generic Taylor-type rules, where the monetary authority reacts in response to output, inflation, and exchange-rate movements. We perform posterior odds test to investigate the hypothesis whether central banks do respond to exchange rates. The main result of this paper is that the central banks of Australia, New Zealand and the U.K. do not, whereas the Bank of Canada does include the nominal exchange rate in its policy rule. This result is robust for various specification of the policy rule, among them an MCI-based rule. Additionally, we find that, based on variance decomposition of the estimated model, that terms-of-trade movements do not contribute significantly to domestic business cycles.

Date: 2003-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (79)

Downloads: (external link)
http://www.econ2.jhu.edu/REPEC/papers/wp505lubik.pdf (application/pdf)

Related works:
Journal Article: Do central banks respond to exchange rate movements? A structural investigation (2007)
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:jhu:papers:505

Access Statistics for this paper

More papers in Economics Working Paper Archive from The Johns Hopkins University,Department of Economics 3400 North Charles Street Baltimore, MD 21218. Contact information at EDIRC.
Bibliographic data for series maintained by Humphrey Muturi ().