Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56313
Authors: 
Adolfson, Malin
Year of Publication: 
2001
Series/Report no.: 
SSE/EFI Working Paper Series in Economics and Finance 478
Abstract: 
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, is 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.
Subjects: 
Exchange rate pass-through
monetary policy
simple policy rules
small open economy
Taylor rule
JEL: 
E52
E58
F41
Document Type: 
Working Paper

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