Arbeitspapier
Robust Taylor rules in an open economy with heterogeneous expectations and least squares learnig
The aim of this paper is threefold: (i) to investigate if there is a unique rational expectations equilibrium (REE) in the small open economy in Gall and Monacelli (2005) that is augmented with technical trading in the foreign exchange market; (ii) to investigate if the unique REE is adaptively learnable in a recursive least squares sense; and (iii) to investigate if the unique and adaptively learnable REE is desirable in an inflation rate targeting regime in the sense that a low and not too variable CPI inflation rate in equilibrium is achieved. The monetary authority is using a Taylor rule when setting the nominal interest rate, and we investigate numerically the properties of the model developed. A main conclusion is that the monetary authority should increase (decrease) the interest rate when the CPI inflation rate increases (decreases) and when the currency gets stronger (weaker) to have a desirable rule that is robust with respect to the degree of technical trading in the foreign exchange market. Thus, the value of the currency is a better response variable than the output gap in the most desirable parametrizations of the interest rate rule.
- ISBN
-
978-952-462-357-5
- Sprache
-
Englisch
- Erschienen in
-
Series: Bank of Finland Research Discussion Papers ; No. 6/2007
- Klassifikation
-
Wirtschaft
Monetary Policy
Foreign Exchange
- Thema
-
determinacy
foreign exchange
inflation rate targeting regime
interest rate rule
robust monetary policy
technical trading
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Bask, Mikael
Selander, Carina
- Ereignis
-
Veröffentlichung
- (wer)
-
Bank of Finland
- (wo)
-
Helsinki
- (wann)
-
2007
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:42 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- Bask, Mikael
- Selander, Carina
- Bank of Finland
Entstanden
- 2007
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