Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/145341
Authors: 
Klaassen, Franc
Mavromatis, Kostas
Year of Publication: 
2016
Series/Report no.: 
Tinbergen Institute Discussion Paper 16-034/VI
Abstract: 
Central banks with an exchange rate objective set the interest rate in response to what they call ''pressure.'' Instead, existing interest rate rules rely on the exchange rate minus its target. To stay closer to actual policy, we introduce a rule that uses exchange market pressure (EMP), the tendency of the currency to depreciate. Our rule can also explain a high interest rate even if the actual exchange rate is on target, in contrast to traditional rules. A further improvement is that the coefficient for EMP depends on the interest rate effectiveness: the rate should be used less if it is more effective. This shows how policy makers should adapt their policy in case of a structural change to avoid missing their objective. Our rule can be applied to many regimes, from the float to the fixed, and to many models, such as the New Keynesian model, as we illustrate.
Subjects: 
DSGE
exchange market pressure
exchange rate regime
fixed exchange rate
monetary policy
open economy Taylor rule
JEL: 
E43
E52
F31
F33
Document Type: 
Working Paper

Files in This Item:
File
Size
355.69 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.