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Instrument rules in monetary policy under heterogeneity in currency trade

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  • Bask, Mikael

Abstract

We embed different instrument rules into Gal?and Monacelli's new Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, conditions for a determinate and least squares learnable REE are in focus. When a contemporaneous data specification of the rule is used in policy-making, the degree of trend following in currency trade does not affect these conditions, except in case of an extensive use of trend following, whereas a forward expectations specification makes it less likely to have a determinate and learnable REE when the degree of trend following is increasing. We allow for interest rate inertia in the analysis.

Suggested Citation

  • Bask, Mikael, 2009. "Instrument rules in monetary policy under heterogeneity in currency trade," Journal of Economics and Business, Elsevier, vol. 61(2), pages 97-111.
    • Handle: RePEc:eee:jebusi:v:61:y:2009:i:2:p:97-111
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    Cited by:

    1. Mikael Bask, 2014. "A Case For Interest Rate Inertia In Monetary Policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 140-159, March.
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    3. Bask, Mikael, 2007. "Long swings and chaos in the exchange rate in a DSGE model with a Taylor rule," Research Discussion Papers 19/2007, Bank of Finland.

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    More about this item

    Keywords

    Determinacy DSGE model Interest rate rule Least squares learning Technical trading;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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