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

Arbeitspapier

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.

Object Details

• Language: Englisch

Classification and Topics

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

Contributors, Places and Time

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

Further information

• Handle: http://hdl.handle.net/10419/269882
• Last update: 10.03.2025, 11:41 AM CET