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The real exchange rate in Taylor rules: A Re-Assessment

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  • Froyen, Richard T.
  • Guender, Alfred V.

Abstract

Examining alternative flexible inflation targeting strategies, we find that a small concern for real exchange rate stability as a policy goal matters. First, it warrants the inclusion of the real exchange rate in Taylor rules and, second, it is sufficient to improve the performance of Taylor rules relative to optimal policy. Gains are substantial because a small weight on real exchange rate fluctuations makes optimal policy less aggressive.

Suggested Citation

  • Froyen, Richard T. & Guender, Alfred V., 2018. "The real exchange rate in Taylor rules: A Re-Assessment," Economic Modelling, Elsevier, vol. 73(C), pages 140-151.
    • Handle: RePEc:eee:ecmode:v:73:y:2018:i:c:p:140-151
    DOI: 10.1016/j.econmod.2018.03.011
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    More about this item

    Keywords

    CPI; Domestic inflation targeting; Taylor rules; Timeless perspective; Real exchange rate; E3; E5; F3;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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