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BUBBLES IN EXCHANGE RATES AND MONETARY POLICY
Author(s) -
Alexandre Fernando,
Bação Pedro,
Driffill John
Publication year - 2011
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2010.00539.x
Subject(s) - economics , exchange rate , rational expectations , monetary policy , context (archaeology) , value (mathematics) , markov chain , welfare , monetary economics , econometrics , persistence (discontinuity) , keynesian economics , macroeconomics , mathematics , statistics , market economy , paleontology , geotechnical engineering , biology , engineering
We evaluate the macroeconomic performance of different monetary policy rules when there are bubbles in the exchange rate. We do this in the context of a non‐linear rational expectations model. The exchange rate is allowed to deviate from its fundamental value and the persistence of the deviation is modeled as a Markov switching process. Our results suggest that reacting to exchange rate movements does not significantly improve welfare. However, taking into account the switching nature of the economy may be more beneficial.