The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics

Cavoli, Tony

doi:10.1016/j.econmod.2008.01.006

Cited by 17 publications

(13 citation statements)

References 27 publications

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“…In Wollmershäuser's (2006) case, a high degree of exchange rate uncertainty results into an exchange rate reaction in the monetary policy rule; in Cavoli's (2008) case, some specifications of the central bank's loss function result into an exchange rate reaction in the optimal monetary policy rule; and in Bask and Selander's (2009) case, heterogeneity in currency trade results into an exchange rate reaction in the monetary policy rule. Undoubtedly, we have not discussed all the papers in the literature but it is anyhow alluring to agree with Taylor (2001, p. 267) when he writes that "monetary-policy rules that react directly to the exchange rate […] sometimes work worse than policy rules that do not react directly to the exchange rate", even though the arguments differ in the papers discussed herein.…”

Section: Introductionmentioning

confidence: 99%

“…On the other hand, Cavoli (2008) derives optimal monetary policy rules under different assumptions about the central bank's loss function and finds that the exchange rate should be included in the interest rate rule in targeting regimes such as CPI and domestic inflation rate targeting regimes. Finally, Bask and Selander (2009) present a macroeconomic model with heterogeneity in currency trade and find that the central bank should react to the exchange rate in its policy.…”

Section: Introductionmentioning

confidence: 99%

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A Case for Interest Rate Inertia in Monetary Policy

Bask

2012

Int. J. Fin. Econ.

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: We argue that it is not necessary for the central bank to react to the exchange rate to have a desirable outcome in the economy. Indeed, when the Taylor rule includes contemporaneous data on the variables in the rule, the central bank can disregard from the exchange rate as long as there is enough with interest rate inertia in monetary policy. The reason is that interest rate inertia and a reaction to the current nominal exchange rate change are perfect substitutes in monetary policy. Hence, we give a rationale for the central bank to focus on the interest rate change rather than the interest rate level to have a desirable outcome in the economy, which we define as a determinate rational expectation equilibrium that is stable under least squares learning. Terms of use: Documents inJEL codes: E52; F31.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

A Case for Interest Rate Inertia in Monetary Policy

Bask

2012

Int. J. Fin. Econ.

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“…In contrast to the analytical work to date on these issues, we present monetary policies in the form of an optimal monetary policy rule (MPR) where the instrument of policy is the real interest rate (see Ball, 1999;Cavoli, 2008Cavoli, , 2009. This allows us to examine how the policy instrument reacts to key economic information -including the extent of CBI and the existence of corruption.…”

Section: Introductionmentioning

confidence: 99%

Corruption, central bank (in)dependence and optimal monetary policy in a simple model

Cavoli

Wilson

2015

Journal of Policy Modeling

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“…This continuing importance of the exchange rate, and the potential threat it might pose to the existing macroeconomic framework of inflation supremacy and free capital account convertibility, has not remained unacknowledged by neoclassical economists and IFIs. Several authors have proposed a certain degree of exchange rate management within an ITR, coming under a range of different names such as inflation targeting ‘lite’ or flexible inflation targeting (Bofinger and Wollmershäuser, ; Cavoli, ; Cavoli and Rajan, ; Goldstein, ; Mishkin and Savastano, ). In these proposals inflation remains the main and overriding nominal anchor, but DECs are permitted to intervene in the FX market to smooth excess volatility.…”

Section: Introductionmentioning

confidence: 99%

The Impossible Trinity: Inflation Targeting, Exchange Rate Management and Open Capital Accounts in Emerging Economies

Kaltenbrunner¹,

Painceira²

2017

Development and Change

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This article contributes to the debate on macroeconomic management and capital account regulations in developing and emerging countries (DECs). It argues that the recommendation by neoclassical economists and international financial institutions (IFIs) to combine an inflation-targeting regime with exchange rate management, whilst maintaining open capital accounts, is not only impossible but also potentially counterproductive. The article draws on extensive semi-structured interviews with currency traders in Brazil and London to show that this is due to the particular way such a regime shapes central bank interventions in the money and foreign exchange markets and the destabilizing way these interventions interact with financial market expectations. The interview results also demonstrate that the guidelines issued by IFIs actually undermine, rather than aid, DEC central banks' initial attempts to manage excessive exchange rate movements. These results support the long-standing argument by heterodox economists and critical international political economists that DECs need to make the exchange rate an explicit instrument and goal of their macroeconomic policy and complement it with comprehensive capital account regulations to reduce the destabilizing impact of international capital flows. The interview results also give some concrete suggestions on how to achieve this.

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The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics

Cited by 17 publications

References 27 publications

A Case for Interest Rate Inertia in Monetary Policy

A Case for Interest Rate Inertia in Monetary Policy

Corruption, central bank (in)dependence and optimal monetary policy in a simple model

The Impossible Trinity: Inflation Targeting, Exchange Rate Management and Open Capital Accounts in Emerging Economies

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