Instrument rules in monetary policy under heterogeneity in currency trade
Bask, Mikael (01.08.2007)
Numero
22/2007Julkaisija
Suomen Pankki
2007
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-20140807386Tiivistelmä
We embed different instrument rules into a New Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, this paper focuses on conditions for a determinate, least-squares learnable rational expectations equilibrium (REE). Under an interest rate rule with only contemporaneous macroeconomic data, the intensity of technical trading or trend-seeking in currency trade does not affect these conditions, except in the case of an extensive use of trend-seeking. On the other hand, if the central bank uses only forward-looking information in its interest rate rule, a determinate and learnable REE is a less likely outcome when trend-seeking in currency trade becomes more popular. The interest rate rule followed by the central bank in the model incorporates interest rate smoothing. Keywords: determinacy, DSGE model, interest rate rule, least-squares learning, technical trading JEL classification numbers: C62, E52, F31, F41
Julkaisuhuomautus
Published in Journal of Economics and Business, Volume 61, Issue 2, March-April 2009: 97-111