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EXCHANGE RATE STABILISATION, LEARNING AND THE TAYLOR PRINCIPLE
Author(s) -
SPAHN HEINZPETER
Publication year - 2007
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/j.1467-8454.2007.00310.x
Subject(s) - taylor rule , interest rate , economics , new keynesian economics , inflation (cosmology) , imperfect , monetary policy , exchange rate , simple (philosophy) , rational expectations , nominal interest rate , keynesian economics , macroeconomics , mathematical economics , real interest rate , econometrics , central bank , philosophy , linguistics , physics , epistemology , theoretical physics
The paper explores whether central banks can keep their interest rates independent from given foreign rates, and to what extent interest policies designed to stabilise nominal exchange rate changes can be applied instead of, or in addition to, the traditional interest rate response to inflation gaps. This modification of a Taylor Rule is analysed in a simple macro model with some New Keynesian features. Information is imperfect; agents cannot build rational expectations but try to learn ‘true’ market relations. Results show that the Taylor Principle can be generalised in an open economy with flexible exchange rates.