Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82595
Authors: 
Bask, Mikael
Year of Publication: 
2011
Series/Report no.: 
Working Paper, Department of Economics, Uppsala University 2011:16
Abstract: 
We argue that it is not necessary for the central bank to react to the exchange rate to have a desirable outcome in the economy. Indeed, when the Taylor rule includes contemporane-ous data on the variables in the rule, the central bank can disregard from the exchange rate as long as there is enough with interest rate inertia in monetary policy. The reason is that interest rate inertia and a reaction to the current nominal exchange rate change are perfect substitutes in monetary policy. Hence, we give a rationale for the central bank to focus on the interest rate change rather than the interest rate level to have a desirable outcome in the economy, which we define as a determinate rational expectation equilibrium that is stable under least squares learning.
Subjects: 
Determinacy
Foreign Exchange
Interest Rate Inertia
Least Squares Learning
Mone-tary Policy
Taylor Rule
JEL: 
E52
F31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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