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Taylor Rules and the Deutschmark-Dollar Real Exchange Rate

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Author Info
Charles Engel
Kenneth D. West

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Abstract

We explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate. The interest rate rule, in conjunction with some standard assumptions, implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials. The weights are functions of the parameters of the interest rate rule. An initial look at German data yields some support for the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10995.

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Date of creation: Dec 2004
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Handle: RePEc:nbr:nberwo:10995

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Jordi Gali & Tommaso Monacelli, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," NBER Working Papers 8905, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Woo, Wing T., 1985. "The monetary approach to exchange rate determination under rational expectations: The dollar-deutschmark rate," Journal of International Economics, Elsevier, vol. 18(1-2), pages 1-16, February. [Downloadable!] (restricted)
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  6. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May. [Downloadable!] (restricted)
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  25. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kenneth D. West, 2004. "Monetary Policy and the Volatility of Real Exchange Rates in New Zealand," NBER Working Papers 10280, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Nelson C. Mark, 2005. "Changing Monetary Policy Rules, Learning, and Real Exchange Rate Dynamics," NBER Working Papers 11061, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jan J J Groen & Akito Matsumoto, . "Real exchange rate persistence and systematic monetary policy behaviour," Bank of England working papers 231, Bank of England. [Downloadable!]
  4. Ram Sharan Kharel & Christopher Martin & Costas Milas, 2006. "The Complex Response of Monetary Policy to the Exchange Rate," Keele Economics Research Papers KERP 2006/17, Centre for Economic Research, Keele University. [Downloadable!]
    Other versions:
  5. Jian Wang & Jason J. Wu, 2008. "The Taylor rule and forecast intervals for exchange rates," Globalization and Monetary Policy Institute Working Paper 22, Federal Reserve Bank of Dallas. [Downloadable!]
    Other versions:
  6. Charles Engel & Kenneth D. West, 2004. "Accounting for Exchange Rate Variability in Present-Value Models When the Discount Factor is Near One," NBER Working Papers 10267, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. John B. Taylor, 2007. "The Explanatory Power of Monetary Policy Rules," NBER Working Papers 13685, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Roman Frydman & Michael D. Goldberg & Søren Johansen & Katarina Juselius, 2009. "A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings," CREATES Research Papers 2009-01, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
  9. Nandwa, B., 2006. "Implication of the Taylor Rule on Real Exchange Rate Movement in Kenya," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2). [Downloadable!] (restricted)
  10. di Giovanni, Julian & McCrary, Justin & von Wachter, Till, 2005. "Following Germany's Lead: Using International Monetary Linkages to Identify the Effect of Monetary Policy on the Economy," IZA Discussion Papers 1495, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  11. Fousseni Chabi-Yo & Jun Yang, 2007. "A No-Arbitrage Analysis of Macroeconomic Determinants of Term Structures and the Exchange Rate
    ," Working Papers 07-21, Bank of Canada. [Downloadable!]
  12. Marcel Fratzscher, 2007. "US shocks and global exchange rate configurations," Working Paper Series 835, European Central Bank. [Downloadable!]
    Other versions:
  13. Simone Casellina & Mariacristina Uberti, 2008. "Optimal Monetary Policy and Long-term Interest Rate Dynamics: Taylor Rule Extensions," Computational Economics, Springer, vol. 32(1), pages 183-198, September. [Downloadable!] (restricted)
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