Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
964342 | Journal of International Money and Finance | 2008 | 23 Pages |
Abstract
We propose a theory of exchange rate determination under interest rate rules in a two-country model. We first show that simple interest rate feedback rules can determine a unique and stable equilibrium without any explicit reaction to the nominal exchange rate. We characterize how the behavior of the exchange rate and of the terms of trade depends in a critical way on the monetary regime chosen, though not necessarily on monetary shocks. We give a simple account of exchange rate volatility in terms of monetary policy rules, we provide an explanation of the relation between nominal exchange rate volatility and macroeconomic variability in terms of the monetary regime adopted by monetary authorities.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Gianluca Benigno, Pierpaolo Benigno,