Monetary Policy Rules and the Exchange Rate
63 Pages Posted: 30 May 2001
Date Written: May 2001
A positive and normative evaluation of alternative monetary policy regimes is addressed in a two-country general equilibrium model. The behaviour of the exchange rate, as well as of the other macroeconomic variables, depends crucially on the monetary regime chosen, though not necessarily on monetary shocks. The centralized welfare criterion presents a trade-off between stabilizing the economy around the flexible-price allocation and reducing the volatility of the nominal interest rates. In this framework, some form of control of the exchange rate is welfare improving.
Keywords: Monetary policy rules, exchange rate regimes, welfare criterion
JEL Classification: E52, F41
Suggested Citation: Suggested Citation