Instrument rules in monetary policy under heterogeneity in currency trade

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Title: Instrument rules in monetary policy under heterogeneity in currency trade
Author: Bask, Mikael
Organization: Suomen Pankki
Series: Bank of Finland Research Discussion Papers
Series number: 22/2007
Year of publication: 2007
Publication date: 1.8.2007
Published in: Published in Journal of Economics and Business, Volume 61, Issue 2, March-April 2009: 97-111
Pages: 27 s.
Keywords: avoin talous; rahapolitiikka; säännöt; korot; valuuttakauppa; valuuttamarkkinat; makrotalous; DSGE;
JEL: C62; E52; F31; F41
Abstract: 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
Note: Ilmestynyt myös Journal of economics and business 2009 ; 61 ; 2.

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