Annicchiarico, Barbara and Piergallini, Alessandro (2009): Country-Specific Risk Premium, Taylor Rules, and Exchange Rates.
Download (185Kb) | Preview
The adoption of a Taylor-type monetary policy rule and an inflation target for emerging market economies that choose a flexible exchange rate regime is often advocated. This paper investigates the issue of exchange rate determination when interest-rate feedback rules are implemented in a continuous-time optimizing model of a small open economy facing an imperfect global capital market. It is demonstrated that when a risk premium on external debt affects the monetary policy transmission mechanism, the Taylor principle is not a necessary condition for determinacy of equilibrium. On the other hand, it is shown that exchange rate dynamics critically depends on whether monetary policy is active or passive.
|Item Type:||MPRA Paper|
|Original Title:||Country-Specific Risk Premium, Taylor Rules, and Exchange Rates|
|Keywords:||Risk Premium on Foreign Debt; Taylor Rules; Exchange Rate Dynamics|
|Subjects:||F - International Economics > F3 - International Finance > F32 - Current Account Adjustment; Short-Term Capital Movements
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Barbara Annicchiarico|
|Date Deposited:||22. Feb 2009 01:50|
|Last Modified:||18. Feb 2013 22:08|
Agénor, P.R. and P.J. Montiel (1999), Development Macroeconomics, Princeton and Oxford: Princeton University Press.
Bardhan, P.K. (1967), `Optimum Foreign Borrowing' in K. Shell (Ed.), Essays on the Theory of Optimal Economic Growth, Cambridge (MA): The MIT Press.
Bhandari, J.S., N.U. Haque and S.J. Turnovsky (1990), `Growth, External Debt, and Sovereign Risk in a Small Open Economy', IMF Staff Papers, 37, 388-417.
Fischer, S. (2001), `Exchange Rate Regimes: Is the Bipolar View Correct?', Journal of Economic Perspectives, 15, 3-24.
Galí, J. (2003), `New Perspectives on Monetary Policy, Inflation, and the Business Cycle', in Advances in Economic Theory, edited by: M. Dewatripont, L. Hansen, and S. Turnovsky, 3, 151-197, Cambridge: Cambridge University Press.
King, R.G. (2000), `The New IS-LM Model: Language, Logic, and Limits', Federal Reserve Bank of Richmond Economic Quarterly, 86, 45-103.
Leeper, E.M. (1991), `Equilibria under `Active' and `Passive' Monetary and Fiscal Policy', Journal of Monetary Economics, 27, 129-147.
McCallum, B.T. (2003), `Multiple-Solution Indeterminacies in Monetary Policy Analysis', Journal of Monetary Economics, 50, 1153-1175.
Montiel, P.J. (2003), Macroeconomics in Emerging Markets, Cambridge: Cambridge University Press.
Obstfeld, M. (1982), `Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?', Quarterly Journal of Economics, 97, 251-270.
Taylor, J.B. (1993), `Discretion Versus Policy Rules in Practice', Carnegie-Rochester Conference Series on Public Policy, 39, 195-214.
Taylor, J.B. (1999), Monetary Policy Rules, Chicago and London: University of Chicago Press.
Taylor, J.B. (2001), `Using Monetary Policy Rules in Emerging Market Economies', in Stabilization and Monetary Policy: The International Experience, Mexico City: Bank of Mexico, 441-458.
Turnovsky, S.J. (1997), International Macroeconomic Dynamics, Cambridge (MA): The MIT Press.
Woodford, M. (2003), Interest and Prices, Princeton and Oxford: Princeton University Press.
Available Versions of this Item
Country-Specific Risk Premium, Taylor Rules, and Exchange Rates. (deposited 22. Feb 2009 07:24)
Country-Specific Risk Premium, Taylor Rules, and Exchange Rates. (deposited 22. Feb 2009 07:23)
- Country-Specific Risk Premium, Taylor Rules, and Exchange Rates. (deposited 22. Feb 2009 01:50) [Currently Displayed]
- Country-Specific Risk Premium, Taylor Rules, and Exchange Rates. (deposited 22. Feb 2009 07:23)