Expected Regime Change: Transition toward Nominal Exchange Rate Stability

Czech National Bank, Research Department Working Papers, 2013-02

48 Pages Posted: 6 Jun 2013

See all articles by František Brázdik

František Brázdik

Czech National Bank; Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: January 1, 2013

Abstract

This work presents an extension of a small open economy DSGE model allowing the transition toward a monetary policy regime aimed at exchange rate stability to be described. The model is estimated using the Bayesian technique to fit the properties of the Czech economy. In the scenarios assessed, the monetary authority announces and changes its policy so that it is focused solely on stabilizing the nominal exchange rate after a specific transition period is over. Four representative forms of monetary policy are followed to evaluate their properties over the announced transition period. Welfare loss functions assessing macroeconomic stability are defined, allowing the implications of the transition period regime choice for macroeconomic stability to be assessed. As these experiments show, exchange rate stabilization over the transition period does not deliver the lowest welfare loss. Under the assumptions taken, the strict inflation-targeting regime is identified as the best-performing regime for short transition periods. However, it can be concluded that for longer transition periods the monetary policy regime should respond to changes in the exchange rate.

Keywords: monetary policy change, new Keynesian models, small open economy

JEL Classification: E17, E31, E52, E58, E61, F02, F41

Suggested Citation

Brázdik, František, Expected Regime Change: Transition toward Nominal Exchange Rate Stability (January 1, 2013). Czech National Bank, Research Department Working Papers, 2013-02 . Available at SSRN: https://ssrn.com/abstract=2274682 or http://dx.doi.org/10.2139/ssrn.2274682

František Brázdik (Contact Author)

Czech National Bank ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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