Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82404
Authors: 
Adolfson, Malin
Year of Publication: 
2002
Series/Report no.: 
Sveriges Riksbank Working Paper Series 136
Abstract: 
This paper investigates the performance of various monetary rules 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. A direct exchange rate response improves welfare only if the other reaction coefficients, on inflation and output, are sub-optimal. However, an indirect exchange rate response, through a policy reaction to Consumer Price Index (CPI) inflation rather than to domestic inflation, is welfare enhancing. This result is independent of whether society values domestic or CPI inflation stabilization.
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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