Monetary Policy Rules and the Exchange Rate
Bank of England - Monetary Assessment and Strategy Division; London School of Economics & Political Science (LSE) - Department of Economics
New York University - Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
A positive and normative evaluation of alternative monetary policy regimes is addressed in a simple two-country general equilibrium model. The behavior 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. Some form of control of the exchange rate is desirable.
Number of Pages in PDF File: 61
JEL Classification: E50, E58, F41, F42
Date posted: July 30, 2000