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New International Monetary Arrangements and the Exchange Rate

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Abstract
I show how to implement in a simple manner the comparison of alternative monetary policy rules in a two- country model of the new generation. These rules are: Full Price Stability, Taylor, Fixed and Managed Exchange Rates. I find, first, that the exchange rate dynamic is non-stationary unless some form of management is undertaken by the respective monetary authorities of the two countries. However, eliminating the excess volatility of the exchange rate does not significantly alter the overall macroeconomic volatility. Second, a floating exchange rate regime based on a Taylor-type rule seems to better approximate the full price stability benchmark, but at the cost of boosting interest rate volatility. In this respect limiting exchange rate flexibility is desirable. Finally, in all cases the model delivers positive cross-country correlation of interest rates but negative cross-country correlation of output.

Suggested Citation

  • Tommaso Monacelli, 2001. "New International Monetary Arrangements and the Exchange Rate," Working Papers 54, Oesterreichische Nationalbank (Austrian Central Bank).
    • Handle: RePEc:onb:oenbwp:54
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    1. Marvin Goodfriend & Robert G. King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296, National Bureau of Economic Research, Inc.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Ben S. Bernanke & Julio J. Rotemberg (ed.), 1997. "NBER Macroeconomics Annual 1997," MIT Press Books, The MIT Press, edition 1, volume 1, number 026252242x, April.
    4. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    5. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    6. Benigno, Pierpaolo & Benigno, Gianluca, 2001. "Price Stability as a Nash Equilibrium in Monetary Open-Economy Models," CEPR Discussion Papers 2757, C.E.P.R. Discussion Papers.
    7. Vitor Gaspar & Frank Smets, 2000. "Price Level Stability: Some Issues," National Institute Economic Review, National Institute of Economic and Social Research, vol. 174(1), pages 68-79, October.
    8. Taylor, John B. (ed.), 2001. "Monetary Policy Rules," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226791258, September.
    9. Julio J. Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361, National Bureau of Economic Research, Inc.
    10. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    11. repec:sae:niesru:v:174:y::i:1:p:68-79 is not listed on IDEAS
    12. Jordi Gali & Tommaso Monacelli, 1999. "Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Boston College Working Papers in Economics 438, Boston College Department of Economics, revised 15 Nov 1999.
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    Cited by:

    1. Cavallo, Michele & Ghironi, Fabio, 2002. "Net foreign assets and the exchange rate: Redux revived," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 1057-1097, July.
    2. Eric Jondeau & Jean-Guillaume Sahuc, 2008. "Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-Country Heterogeneity," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 23-72, June.
    3. Michael B. Devereux & James Yetman, 2002. "Price Setting and Exhange Rate Pass-Through," Working Papers 222002, Hong Kong Institute for Monetary Research.
    4. Devereux, Michael B. & Yetman, James, 2010. "Price adjustment and exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 181-200, February.
    5. Faia, Ester, 2002. "Monetary policy in a world with different financial systems," Working Paper Series 183, European Central Bank.

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    More about this item

    Keywords

    monetary policy rules; exchange rate;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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