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Professor of Economics
Monetary Policy Rules; Exchange Rate Management; Time-Varying Risk Premium; Welfare; JEL Classification: E52; F31; F41
Heipertz J., Mihov I., Santacreu A. M. (2022). Managing Macroeconomic Fluctuations With Flexible Exchange Rate Targeting Journal of Economic Dynamics and Control, 135
The authors show that a monetary policy rule that uses the exchange rate to stabilize the economy can outperform a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare.The differences between the rules are driven by: (i) the paths of the nominal exchange rate and the interest rate under each rule and (ii) external habits in consumption, which leads to deviations from uncovered interest parity.These differences are larger in economies, which are very open, which are more exposed to foreign shocks, or in which domestic and foreign goods are highly substitutable.