Monetary Policy And Exchange Rate Volatility In A Small Open Economy

Author : Jonas Böhmer
Publisher : GRIN Verlag
ISBN 13 : 3640438361
Total Pages : 41 pages
Book Rating : 4.65/5 ( download)

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Download or read book Monetary Policy and Exchange Rate Volatility in a Small Open Economy written by Jonas Böhmer and published by GRIN Verlag. This book was released on 2009-10 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2008 in the subject Business economics - Economic Policy, grade: 1,3, University of Bonn (Wirtschaftspolitische Abteilung der Rechts- und Staatswissenschaftlichen Fakultät), course: Geldtheorie- und politik, language: English, abstract: Does inflation reduce welfare? What is worse, a volatile exchange rate or a high inflation rate? And is the central bank able to drive these variables? These questions are the topic of a paper by Jordi Gali and Tommaso Monacelli, published in 2005 and titled "Monetary Policy and Exchange Rate Volatility in a Small Open Economy". As apparent by the title Gali and Monacelli (G+M) analyze the influence of monetary policy on the volatility of the exchange rate, more precisely the nominal exchange rate and the terms of trade. For this purpose they create a small open economy with sticky prices of Calvo-type. Due to its minor size this economy does not influence the world economy. However, depending on the degree of openness this economy is affected by the rest of the world. Having specified this framework, G+M introduce three different monetary regimes and evaluate the resulting exchange rate volatilities . Using a central bank loss function G+M rank these three rules according to the implied welfare which shows a positive correlation between welfare and exchange rate volatility. Thence G+M prefer Taylor rules over an exchange rate pegging. To get a general idea of Gali and Monacelli`s argumentation this expose will start in chapter 2 with an abbreviated overlook over G+M's model of a small open economy. In the following chapter there will be the introduction of the three central bank rules, necessary to close the model, as well as an analysis of the underlying welfare levels. Since the welfare evaluation is based on some special assumptions, chapter 4 will give an overview of recent literature which discusses possible extensions as well as their implications for G+M's ranking of implied welfare. Concluding cha

Author : Jordi Galí
Publisher :
ISBN 13 :
Total Pages : 64 pages
Book Rating : 4.91/5 ( download)

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Download or read book Monetary Policy and Exchange Rate Volatility in a Small Open Economy written by Jordi Galí and published by . This book was released on 2002 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to a tractable canonical system in domestic inflation and the output gap. We employ this framework to analyze the macroeconomic implications of three alternative monetary policy regimes for the small open economy: domestic inflation targeting, CPI targeting and an exchange rate peg. We show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail. We also discuss a special case for which domestic inflation targeting constitutes the optimal policy, and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with suboptimal regimes.

Author : Ana Maria Santacreu
Publisher :
ISBN 13 :
Total Pages : 16 pages
Book Rating : 4.11/5 ( download)

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Download or read book Monetary Policy in Small Open Economies written by Ana Maria Santacreu and published by . This book was released on 2019 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: Understanding the costs and benefits of alternative monetary policy rules is important for economic welfare. Within the context of a small open economy model and building on the work of Mihov and Santacreu (2013), the author analyzes the economic implications of two monetary policy rules. The first is a rule in which the central bank uses the nominal exchange rate as its policy instrument and adjusts the rate whenever there are changes in the economic environment. The second is a standard interest rate rule in which the central bank adjusts the short-term nominal interest rate to changes in the economic environment. The main finding of the analysis is that, if the uncovered interest parity condition that establishes a tight link between the interest rate differential in two countries and the expected rate of depreciation of their currencies does not hold, the exchange rate rule outperforms the standard interest rate rule in lowering the volatility of key economic variables. There are two main reasons for this: First, the actual implementation of the exchange rate rule avoids the overshooting effect on exchange rates characteristic of an interest rate rule. And second, the risk premium that generates deviations from the uncovered interest parity condition is smaller and less volatile under an exchange rate rule.

Author : Jorge Restrepo
Publisher : International Monetary Fund
ISBN 13 : 1451873816
Total Pages : 59 pages
Book Rating : 4.18/5 ( download)

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Download or read book Hybrid Inflation Targeting Regimes written by Jorge Restrepo and published by International Monetary Fund. This book was released on 2009-10-01 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank's policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exhange rate smoothing because of the perverse impact of exchange rate movements on activity.

Author : Camila Casas
Publisher : International Monetary Fund
ISBN 13 : 1484330609
Total Pages : 62 pages
Book Rating : 4.09/5 ( download)

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Download or read book Dominant Currency Paradigm: A New Model for Small Open Economies written by Camila Casas and published by International Monetary Fund. This book was released on 2017-11-22 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Author : Mr.Marco Airaudo
Publisher : International Monetary Fund
ISBN 13 : 1475523165
Total Pages : 65 pages
Book Rating : 4.64/5 ( download)

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Download or read book Inflation Targeting and Exchange Rate Management In Less Developed Countries written by Mr.Marco Airaudo and published by International Monetary Fund. This book was released on 2016-03-08 with total page 65 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy where macroeconomic fluctuations can be driven by self-fulfilling expectations. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank leans heavily against the wind in a managed float.

Author : Alan Sutherland
Publisher :
ISBN 13 :
Total Pages : 48 pages
Book Rating : 4.46/5 ( download)

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Download or read book Inflation Targeting in a Small Open Economy written by Alan Sutherland and published by . This book was released on 2001 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Author : Jean-OIiver Hairault
Publisher : Routledge
ISBN 13 : 1134426127
Total Pages : 446 pages
Book Rating : 4.26/5 ( download)

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Download or read book Exchange Rate Dynamics written by Jean-OIiver Hairault and published by Routledge. This book was released on 2003-12-18 with total page 446 pages. Available in PDF, EPUB and Kindle. Book excerpt: This important new book builds upon the seminal work by Obsfeld and Rogoff, Foundations of International Macroeconomics and aims at providing a coherent and modern framework for thinking about exchange rate dynamics. With a wide range of contributions, this book is likely to be welcomed by the macroeconomics and financial community.

Author : Mr.Eric Parrado
Publisher : INTERNATIONAL MONETARY FUND
ISBN 13 : 9781451921892
Total Pages : 37 pages
Book Rating : 4.96/5 ( download)

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Download or read book Inflation Targeting and Exchange Rate Rules in an Open Economy written by Mr.Eric Parrado and published by INTERNATIONAL MONETARY FUND. This book was released on 2004-02-01 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a simple dynamic neo-Keynesian model that can be used to analyze the impact of monetary policy that considers inflation targeting in a small open economy. This economy is characterized by imperfect competition and short-run price rigidity. The main findings of the paper are that, depending on what shocks affect the economy, the effects of inflation targeting on output and inflation volatility depend crucially on the exchange rate regime and the inflation index being targeted. First, in the presence of real shocks, flexible exchange rates dominate managed exchange rates, while for nominal shocks the reverse is true. Second, domestically generated inflation targeting is preferable to CPI inflation targeting, because the former is more stabilizing not only in relation to both measures of inflation, but also to the output gap and the real exchange rate. Finally, flexible inflation targeting outperforms strict inflation targeting in terms of welfare.

Author : Hyung Suk Kim
Publisher :
ISBN 13 : 9781267758071
Total Pages : pages
Book Rating : 4.74/5 ( download)

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Download or read book Essays on Dynamic Effects of Exchange Rate Volatility Shocks on a Small Open Economy written by Hyung Suk Kim and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by the existence of time-varying volatility in exchange rates, the paper investigates the effects of exchange rate volatility shocks on a small open economy. First, we use a high-frequency dataset to generate a volatility measure for the period, instead of the traditional moving average standard deviation of exchange rates. The structural VAR impulse responses utilizing the volatility measure yield more significant and robust reactions of real variables to a volatility shock. Consumption, ouput, investment and net export exhibit non-trivial decrease upon impact of the shock. On the contrary, an exchange rate level shock and the traditional volatility measure fail to generate robust impulse responses under different Cholseky orderings. Second, we develop a theoretical model based on a standard New Keynesian small open economy, which can replicate the effects of a volatility shock observed in the VAR result. We solve the model up to a third order approximation so that the solution includes an explicit time-varying volatility term. The model impulse responses exhibit that real variables respond to a volatility shock and they are qualitatively consistent with the VAR result. The underlying mechanism is precautionary saving. The result is sensitive to various parameters such as the openness parameter and the elasticity of inter-temporal substitution. Finally, we make a welfare analysis regarding the optimal monetary policy. Two types of welfare measures are used: the unconditional mean of utility and the conditional welfare. The conditional welfare suggests that policy makers should raise the interest rate when volatility increases. The seemingly counter-intuitive result is due to the fact that the conditional welfare measure reflects dynamic response of the agent throughout her life-cycle. Under the optimal policy suggested by the conditional welfare, the initial consumption adjustment is severe but agents work less and eventually enjoy a higher level of consumption from savings carried over from earlier periods.