Macroeconomic Stabilisation and Intervention Policy under an Exchange Rate Band
1994 (English)Report (Other academic)
Macroeconomic stabilisatin and foreign exchange market interventions are investigated within the context of a stochastic small open economy. With money demand shocks a peg is optimal, but with goods demand shocks a nominal income target is best. With supply shocks the optimal degree of monetary accommodation rises with the welfare weight attached to output rather than to price stability. A nominal exchange rate band is not advisable from a stabilisation point of view, albeit that with money demand shocks no welfare losses are incurred. With goods demand shocks, narrowing the band affects the optimal coefficient of intramarginal monetary accommodation. With supply shocks and no intramarginal interventions, it is desirable to have a wider band if there is a relatively large weight on price rather than output stability.
Place, publisher, year, edition, pages
Stockholm: IIES , 1994. , 36 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 562
exchange rate bands, multiple shocks, stabilisation, monetary accommodation, intramarginal intervention, wage and price sluggishness, unrestricted dirty float, exchange rate peg, PPP exchange rate rule, Ornstein-Uhlenbeck process, stochastic simulation
IdentifiersURN: urn:nbn:se:su:diva-41886OAI: oai:DiVA.org:su-41886DiVA: diva2:342787
Published in connection with a visit at the IIES.2010-08-112010-08-112010-08-11