Instrument rules in monetary policy under heterogeneity in currency trade |
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Authors: | Mikael Bask |
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Affiliation: | Monetary Policy and Research Department, Bank of Finland, P.O. Box 160, FIN-00101 Helsinki, Finland |
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Abstract: | We embed different instrument rules into Galí and Monacelli’s 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, conditions for a determinate and least squares learnable REE are in focus. When a contemporaneous data specification of the rule is used in policy-making, the degree of trend following in currency trade does not affect these conditions, except in case of an extensive use of trend following, whereas a forward expectations specification makes it less likely to have a determinate and learnable REE when the degree of trend following is increasing. We allow for interest rate inertia in the analysis. |
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