Rational expectations, changing monetary policy rules, and real exchange rate dynamics

Convenience yield and real exchange rate dynamics: A present‐value interpretation

“…The second model is an augmented present-value representation of real exchange rate from the Taylor rule exchange rate model, which was introduced by Engel and West (2005) and Engel and West (2006). The Taylor rule model of real exchange rate incorporates a link to inflation and the output gap underlying the monetary policy rule of central banks, because many recent works have reported its empirical success in explaining the dynamic behaviour of the real exchange rate (Engel and West 2006, Mark 2009, Kim et al 2015, Chen and Chou 2012. 3 Both empirical models deliver a reasonably good fit to the data.…”

“…3 For example, Engel and West (2006) use monthly data of the US and Germany from 1979M10 to 1998M12 and show that the real exchange rate implied by the Taylor rule model has a correlation of 0.32 with the actual real exchange rate. Mark (2009) and Chen and Chou (2012) extend the framework of Engel and West (2006) and allow the monetary policy rule to change over time. Both papers show that the fit of the model-implied real exchange rate can be improved after monetary policies are taken into account and that it has a relatively high correlation with the actual data for long-term horizon changes.…”

Possible effects of domestic and foreign factors on monetary policy implementation in Turkey: a DSGE-VAR approach

“…The original Taylor rule has also been modified so as to include additional variables such as changes in asset prices (Belke & Polleit, 2007;Bernanke & Gertler, 1999;Botzen & Marey, 2010;Cecchetti, Genberg, Lipsky, & Wadhwani, 2000;Clarida, Gali, & Gertler, 1998;Fernandez, Koenig, & Nikolsko-Rzhevskyy, 2010;Fuhrer & Tootell, 2008;Hoffmann, 2013;Rigobon & Sack, 2003;Smets, 1997), variations in long-term interest rates (Clarida, Gali, & Gertler, 1998Goodfriend, 1998;Jones & Kulish, 2013;Smets, 1997;Yüksel, Metin-Ozcan, & Hatipoglu, 2013) and exchange rates (Ball, 1999(Ball, , 2000Berger & Kempa, 2012;Chen & Chou, 2012;Engel & West, 2006;Galí & Monacelli, 2005;Galimberti & Moura, 2013;Hoffmann, 2013;Kempa & Wilde, 2011;Lubik & Schorfheide, 2007;Molodtsova, Nikolsko-Rzhevskyy, & Papell, 2008;Molodtsova & Papell, 2009;Svensson, 2000;Taylor, 2001;Wilde, 2012), among others, into the monetary reaction functions so as to provide a wider explanation to movements in interest rates. On the other hand, this framework may still lack the ability to capture the dynamics of shortterm interest rates relating to the accelerating process of globalisation and openness to external shocks which confronted central banks with challenging economic conditions.…”