Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233278 
Authors: 
Year of Publication: 
2010
Series/Report no.: 
Discussion paper No. 62
Publisher: 
Aboa Centre for Economics (ACE), Turku
Abstract: 
This paper examines the implications of monetary policy rules for exchange rate dynamics. I extend a standard New Open Economy Macroeconomics model with the introduction of a simple money supply rule, whereby central banks change their monetary policy if output diverges from potential output or if inflation diverges from the target inflation. A key result is that, in the case of permanent technology and monetary shocks, the nominal exchange rate does not follow a random walk; instead, the exchange rate undershoots its long-run value. An undershooting of the exchange rate derives from the active monetary policy that both countries conduct.
Subjects: 
Monetary policy rules
open economy macroeconomics
exchange rate
JEL: 
E5
F3
F4
Document Type: 
Working Paper

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