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Title:The Exchange Rate Targeting of Central Banks Revised: The Role of Long-term Interest Rates PDF Logo
Authors:Lahtinen, Markus
Mäki-Fränt, Petri
Issue Date:2007
Series/Report no.:Economics Discussion Papers / Institut für Weltwirtschaft 2007-28
Abstract:Using a New Keynesian macro model, the paper reconsiders the question, whether the central banks should directly respond to exchange rate movements. It is assumed that the transmission of monetary policy to output is carried out by the long-term interest rate, which is determined as a sum of expectations of short-term interest rates and a non-negligible term premium. According to the results, the central banks could gain from stabilizing the exchange rate movements more than suggested in the previous literature. The welfare gains are more clearly seen in the reduced volatility of inflation than stabilization of output, however.
Subjects:Open economy
Exchange rate determination
Monetary policy
JEL:E52
E32
E58
Creative Commons License:http://creativecommons.org/licenses/by-nc/2.0/de/deed.en
Document Type:Working Paper
Appears in Collections:Economics: The Open-Access, Open-Assessment E-Journal - Discussion Papers

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