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An Exchange Rate Policy Rule

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  • Parrado, Eric

Abstract

This paper introduces a novel monetary policy framework where the exchange rate becomes the central instrument. Using Singapore as a case study, it explores the Monetary Authority's adoption of the exchange rate as the primary tool since 1981, diverging from conventional approaches centered on interest rates or monetary aggregates. The estimated exchange rate reaction function aligns well with actual deviations, supporting the hypothesis that Singapore's forward-looking policy rule effectively responds to inflation and output volatility, especially during economic crises. This framework offers a promising alternative for countries with open economies and challenges in implementing traditional interest rate instruments.

Suggested Citation

  • Parrado, Eric, 2023. "An Exchange Rate Policy Rule," IDB Publications (Working Papers) 13347, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:13347
    DOI: http://dx.doi.org/10.18235/0005491
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    References listed on IDEAS

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    6. Ana Santacreu & Ilian Mihov, 2013. "Exchange rates as an instrument of monetary policy," 2013 Meeting Papers 773, Society for Economic Dynamics.
    7. Heipertz, Jonas & Mihov, Ilian & Santacreu, Ana Maria, 2022. "Managing macroeconomic fluctuations with flexible exchange rate targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    8. Caputo, Rodrigo & Herrera, Luis Oscar, 2017. "Following the leader? The relevance of the Fed funds rate for inflation targeting countries," Journal of International Money and Finance, Elsevier, vol. 71(C), pages 25-52.
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    10. Gerlach-Kristen, Petra, 2006. "Internal and external shocks in Hong Kong: Empirical evidence and policy options," Economic Modelling, Elsevier, vol. 23(1), pages 56-75, January.
    11. Hoe Ee Khor & Jason Lee & Edward Robinson & Saktiandi Supaat, 2007. "Managed Float Exchange Rate System: The Singapore Experience," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 52(01), pages 7-25.
    12. Tony Cavoli & Sasidaran Gopalan & Ramkishen S. Rajan, 2023. "Is Exchange Rate Centred Monetary Policy Asymmetric? Empirical Evidence from Singapore," Applied Economics, Taylor & Francis Journals, vol. 55(21), pages 2438-2454, May.
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    More about this item

    Keywords

    exchange rate; Inflation; monetary policy rules; Singapore;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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