Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212080 
Authors: 
Year of Publication: 
2007
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 22/2007
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We embed different instrument rules into a New Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, this paper focuses on conditions for a determinate, least-squares learnable rational expectations equilibrium (REE). Under an interest rate rule with only contemporaneous macroeconomic data, the intensity of technical trading or trend-seeking in currency trade does not affect these conditions, except in the case of an extensive use of trend-seeking. On the other hand, if the central bank uses only forward-looking information in its interest rate rule, a determinate and learnable REE is a less likely outcome when trend-seeking in currency trade becomes more popular. The interest rate rule followed by the central bank in the model incorporates interest rate smoothing.
Subjects: 
determinacy
DSGE model
interest rate rule
least-squares learning
technical trading
JEL: 
C62
E52
F31
F41
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-394-0
Document Type: 
Working Paper

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