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Exchange rate determination under interest rate rules

Benigno, Gianluca and Benigno, Pierpaolo (2008) Exchange rate determination under interest rate rules. Journal of International Money and Finance, 27 (6). pp. 971-993. ISSN 0261-5606

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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.

Item Type: Article
Official URL: http://www.elsevier.com/wps/find/homepage.cws_home
Additional Information: © 2008 Elsevier B.V
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Sets: Departments > Economics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 14 Apr 2011 15:30
URL: http://eprints.lse.ac.uk/35639/

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