SSE/EFI Working Paper Series in Economics and Finance
No 478:
Incomplete Exchange Rate Pass-Through and Simple Monetary Policy Rules
Malin Adolfson ()
Abstract: The performance of various monetary rules is investigated
in an open economy with incomplete exchange rate pass-through. Implementing
monetary policy through an exchange-rate augmented policy rule does not
improve social welfare compared to using an optimized Taylor rule,
irrespective of the degree of pass-through. However, an indirect exchange
rate response, through a policy reaction to Consumer Price Index (CPI)
inflation rather than to domestic inflation, is welfare enhancing in all
pass-through cases. This result is moreover independent of whether society
values domestic or CPI inflation stabilization. The only case where a
direct real exchange rate response is slightly welfare improving occurs
when the other reaction coefficients, on inflation and output, are
sub-optimal.
Keywords: Exchange rate pass-through; monetary policy; simple policy rules; small open economy; Taylor rule; (follow links to similar papers)
JEL-Codes: E52; E58; F41; (follow links to similar papers)
30 pages, October 31, 2001
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