Money Supply Rules and Exchange Rate Dynamics

Arbeitspapier

This paper examines the implications of monetary policy rules for exchange rate dynamics. I extend a standard New Open Economy Macroeconomics model with the introduction of a simple money supply rule, whereby central banks change their monetary policy if output diverges from potential output or if inflation diverges from the target inflation. A key result is that, in the case of permanent technology and monetary shocks, the nominal exchange rate does not follow a random walk; instead, the exchange rate undershoots its long-run value. An undershooting of the exchange rate derives from the active monetary policy that both countries conduct.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion paper ; No. 62

Classification and Topics

• Classification: Wirtschaft
• Subject: Monetary policy rules ; open economy macroeconomics ; exchange rate

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Tervala, Juha
• Event: Veröffentlichung
• (who): Aboa Centre for Economics (ACE)
• (where): Turku
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/233278
• Last update: 10.03.2025, 11:43 AM CET