Conference Paper

Simple monetary policy rules and exchange rate uncertainty

Abstract: We analyze the performance and robustness of some common simple rules for monetary policy in a new-Keynesian open economy model under different assumptions about the determination of the exchange rate. Adding the exchange rate to an optimized Taylor rule gives only slight improvements in terms of the volatility of important variables in the economy. Furthermore, although the rules including the exchange rate (and in particular, the real exchange rate) perform slightly better than the Taylor rule on average, they sometimes lead to very poor outcomes. Thus, the Taylor rule seems more robust to model uncertainty in the open economy.

Keywords: Monetary policy; Foreign exchange rates;

Status: Published in Asset prices, exchange rates, and monetary policy : a conference (2001: March 2-3)

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Proceedings

Publication Date: 2001

Issue: Mar