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Time Inconsistency and the Exchange Rate Channel of Monetary Policy
Author(s) -
Leitemo Kai,
Roisland Øistein,
Torvik Ragnar
Publication year - 2002
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00293
Subject(s) - economics , monetary policy , discretion , exchange rate , new keynesian economics , monetary economics , open economy , channel (broadcasting) , variable (mathematics) , exchange rate regime , keynesian economics , macroeconomics , mathematical analysis , mathematics , political science , law , electrical engineering , engineering
This paper analyses time–inconsistency problems related to the exchange rate channel of monetary policy. Within a simple open–economy macroeconomic model, where the exchange rate is the only forward–looking variable, we show that a difference emerges between optimal policy under discretion and under commitment. Moreover, the nature of the time–inconsistency problem resembles that resulting from standard New Keynesian models: when cost–push shocks occur, the exchange rate channel gives rise to excessive output stabilisation and insufficient inertia in monetary policy under a discretionary policy. JEL classification : E 42; E 52; E 61