Country-Specific Risk Premium, Taylor Rules, and Exchange Rates

Barbara Annicchiarico () and Alessandro Piergallini

MPRA Paper from University Library of Munich, Germany

Abstract: The adoption of a Taylor-type monetary policy rule and an inflation target for emerging market economies that choose a flexible exchange rate regime is often advocated. This paper investigates the issue of exchange rate determination when interest-rate feedback rules are implemented in a continuous-time optimizing model of a small open economy facing an imperfect global capital market. It is demonstrated that when a risk premium on external debt affects the monetary policy transmission mechanism, the Taylor principle is not a necessary condition for determinacy of equilibrium. On the other hand, it is shown that exchange rate dynamics critically depends on whether monetary policy is active or passive.

Keywords: Risk Premium on Foreign Debt; Taylor Rules; Exchange Rate Dynamics (search for similar items in EconPapers)
JEL-codes: E52 F31 F32 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-mon and nep-opm
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https://mpra.ub.uni-muenchen.de/13553/1/MPRA_paper_13553.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/13556/2/MPRA_paper_13556.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/13557/1/MPRA_paper_13557.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/25822/2/MPRA_paper_25822.pdf revised version (application/pdf)

Related works:
Journal Article: Country‐Specific Risk Premium, Taylor Rules, and Exchange Rates (2011)
Working Paper: Country-Specific Risk Premium, Taylor Rules, and Exchange Rates (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13553

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