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Do central banks respond to exchange rate movements? Some new evidence from structural estimation

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  • Wei Dong
Abstract
This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand, and the United Kingdom. We develop and estimate a structural general equilibrium model, in which monetary policy is represented as a simple rule and exchange rate pass‐through is incomplete due to the presence of local currency pricing and distribution services. We find that the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of England have not adjusted interest rates in response to exchange rate movements since the adoption of inflation targeting, while our model selection results for Australia are less clear. Est‐ce que les banques centrales répondent aux mouvements des taux de change? De nouveaux résultats fondés sur des estimations structurelles. Ce texte examine l'impact des mouvements dans le taux de change sur la conduite de la politique monétaire en Australie, au Canada, en Nouvelle‐Zélande, et au Royaume‐Uni. On développe et on calibre un modèle structurel d'équilibre général dans lequel la politique monétaire est représentée par une règle simple et l'impact du taux de change est incomplet à cause de la présence de services de tarification et de distribution de la monnaie locale. On découvre que la Banque du Canada, la Reserve Bank of New Zealand, et la Bank of England n'ajustent pas les taux d'intérêt en réponse aux mouvements de taux de change depuis l'adoption du ciblage de l'inflation alors que les résultats du modèle utilisé sont moins clairs pour l'Australie.

Suggested Citation

  • Wei Dong, 2013. "Do central banks respond to exchange rate movements? Some new evidence from structural estimation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(2), pages 555-586, May.
    • Handle: RePEc:wly:canjec:v:46:y:2013:i:2:p:555-586
    DOI: 10.1111/caje.12023
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    Cited by:

    1. Araújo, Eurilton, 2016. "Determinacy and learnability of equilibrium in a small-open economy with sticky wages and prices," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 16-32.
    2. Gelfer, Sacha, 2021. "Evaluating the forecasting power of an open-economy DSGE model when estimated in a data-Rich environment," Journal of Economic Dynamics and Control, Elsevier, vol. 129(C).
    3. Caraiani, Petre & Gupta, Rangan, 2020. "Is the response of the bank of England to exchange rate movements frequency-dependent?," Journal of Macroeconomics, Elsevier, vol. 63(C).
    4. Alex Ilek & Guy Segal, 2022. "A Simple Theory-Based Estimate of the Real Natural Rate of Interest in Open Economies," Bank of Israel Working Papers 2022.06, Bank of Israel.
    5. Pongsak Luangaram & Nipit Wongpunya, 2022. "Exploring the Role of Exchange Rate in Inflation Targeting: Evidence from Thailand," PIER Discussion Papers 179, Puey Ungphakorn Institute for Economic Research.
    6. Luangaram, Pongsak & Wongpunya, Nipit, 2024. "The effect of trade openness and exchange rate on inflation targeting in Thailand," Journal of Asian Economics, Elsevier, vol. 92(C).
    7. Berg, Kimberly A. & Mark, Nelson C., 2015. "Third-country effects on the exchange rate," Journal of International Economics, Elsevier, vol. 96(2), pages 227-243.
    8. Alstadheim, Ragna & Bjørnland, Hilde C. & Maih, Junior, 2021. "Do central banks respond to exchange rate movements? A Markov-switching structural investigation of commodity exporters and importers," Energy Economics, Elsevier, vol. 96(C).
    9. Montes, Gabriel Caldas & Ferreira, Caio Ferrari, 2020. "Does monetary policy credibility mitigate the fear of floating?," Economic Modelling, Elsevier, vol. 84(C), pages 76-87.
    10. T. Philipp Dybowski & Max Hanisch & Bernd Kempa, 2018. "The role of the exchange rate in Canadian monetary policy: evidence from a TVP-BVAR model," Empirical Economics, Springer, vol. 55(2), pages 471-494, September.
    11. Becksndale Masawi & Sukanto Bhattacharya & Terry Boulter, 2018. "Does the Information Content of Central Bank Speeches Impact on the Level of Exchange Rate? A Comparative Study of Canadian and Australian Central Bank Communications," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(01), pages 1-27, March.

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