Arbeitspapier

Simple Rules of the Monetary Policy and Incomplete Exchange Rate Pass-Through

The performance of various monetary rules is investigated in an open economy with incomplete exchange rate pass-through. Implementing monetary policy through an exchange-rate augmented policy rule does not improve social welfare compared to using an optimized Taylor rule, irrespective of the degree of pass-through. However, an indirect exchange rate response, through a policy reaction to Consumer Price Index (CPI) inflation rather than to domestic inflation, welfare-enhancing in all pass-through cases. This result is moreover independent of whether society values domestic or CPI inflation stabilization. The only case where a direct real exchange rate response is slightly welfare improving occurs when the other reaction coefficients, on inflation and output, are sub-optimal.

Language
Englisch

Classification
Wirtschaft
Subject
Exchange rate pass-through
monetary policy
simple policy rules
small open economy
Taylor rule

Event
Geistige Schöpfung
(who)
Alali, Walid Y.
Event
Veröffentlichung
(who)
ZBW - Leibniz Information Centre for Economics
(where)
Kiel, Hamburg
(when)
2012

Handle
Last update
10.03.2025, 11:41 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Alali, Walid Y.
  • ZBW - Leibniz Information Centre for Economics

Time of origin

  • 2012

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