DP2807 Monetary Policy Rules and the Exchange Rate

Author(s): Pierpaolo Benigno, Gianluca Benigno
Publication Date: May 2001
Keyword(s): Exchange Rate Regimes, Monetary Policy Rules, Welfare Criterion
JEL(s): E52, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2807

A positive and normative evaluation of alternative monetary policy regimes is addressed in a two-country general equilibrium model. The behaviour of the exchange rate, as well as of the other macroeconomic variables, depends crucially on the monetary regime chosen, though not necessarily on monetary shocks. The centralized welfare criterion presents a trade-off between stabilizing the economy around the flexible-price allocation and reducing the volatility of the nominal interest rates. In this framework, some form of control of the exchange rate is welfare improving.