Monetary policy rules and foreign currency positions

De Paoli, Bianca, Küçük-Tuger, Hande and Søndergaard, Jens (2010) Monetary policy rules and foreign currency positions. CEP Discussion Papers (CEPDP1022). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

Using an endogenous portfolio choice model, this paper examines how different monetary policy regimes can lead to different foreign currency positions by changing the cyclical properties of the nominal exchange rate. We find that strict inflation targeting regimes are associated with a short position in foreign currency, while the opposite is true for noninflation targeting regimes. We also explore how these different external positions affect the international transmission of monetary shocks through the valuation channel. When central banks follow inflation targeting Taylor-type rules, valuation effects of monetary expansions are beggar-thy-self, but they are beggar-thy-neighbour in a money growth targeting regime (or when monetary policy puts weight on output stabilization).

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2010 The Author(s)
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HB Economic Theory
JEL classification:	F - International Economics > F3 - International Finance > F31 - Foreign Exchange F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Date Deposited:	29 Feb 2024 14:39
Last Modified:	11 Dec 2024 19:52
URI:	http://eprints.lse.ac.uk/id/eprint/121699

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