Should the Exchange Rate Be in a Monetary Policy Objective Function?

34 Pages Posted: 5 Jun 2005

See all articles by Tatiana Kirsanova

Tatiana Kirsanova

University of Glasgow

Simon Wren-Lewis

University of Oxford - Economics Department

Campbell Leith

University of Glasgow - Department of Economics

Date Written: November 2004

Abstract

Following from Woodford's derivation of a benevolent monetary policy maker's objective function from agents utility, a number of papers have suggested that policy in an open economy should have the same objectives as in a closed economy, and in particular that the exchange rate should play no role. We show that this conclusion is not robust to the presence of any shocks to International Risk Sharing. When such shocks are important, the exchange rate appears alongside output and inflation in the social welfare function. However the form of this target is rather different from that used by a number of authors.

Keywords: Monetary Policy, Exchange Rate, Welfare Evaluation

JEL Classification: E31, E52, E58, E61,C61

Suggested Citation

Kirsanova, Tatiana and Wren-Lewis, Simon J.Q. and Leith, Campbell, Should the Exchange Rate Be in a Monetary Policy Objective Function? (November 2004). Available at SSRN: https://ssrn.com/abstract=736264 or http://dx.doi.org/10.2139/ssrn.736264

Tatiana Kirsanova (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Simon J.Q. Wren-Lewis

University of Oxford - Economics Department ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Campbell Leith

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom
++44 141 330 3702 (Phone)
++44 141 330 4940 (Fax)

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