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External Shocks and Monetary Policy. Does it Pay to Respond to Exchange Rate Deviations?

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dc.contributor.author Caputo, Rodrigo
dc.date.accessioned 2014-08-25T02:02:31Z
dc.date.available 2014-08-25T02:02:31Z
dc.date.issued 2009
dc.identifier.citation Revista de Análisis Económico 24(1): 2009, p. 55-99 es_CL
dc.identifier.uri http://repositorio.uahurtado.cl/handle/11242/1893
dc.description There is substantial evidence suggesting that central banks in open economies react to exchange rate fluctuations, in addition to expected inflation and output. In some developing countries this reaction is comparatively larger and it is nonlinear. In an estimated structural macromodel for Chile, this paper assesses the advantages and potential costs of adopting such a reaction function. We conclude that, in the face of most of the external shocks, a policy rule that responds to exchange rate misalignments smooths inflation and output variability, while marginally increasing interest rate fluctuations. On the other hand, for some domestic innovations such a rule performs poorly. When all the shocks are considered at the same time, this rule generates important welfare gains. Finally, when the volatility of external shocks rises, increasing the response to exchange rate misalignments brings welfare improvements. In fact, a more aggressive response to the exchange rate offsets the impact that greater external volatility has on output and inflation, at the cost of inducing higher interest rate fluctuations. In this way, one can interpret the nonlinear reaction to the exchange rate as an optimal response to a more volatile external environment. en_US
dc.language.iso en_US es_CL
dc.publisher ILADES; Georgetown University; Universidad Alberto Hurtado. Facultad de Economía y Negocios es_CL
dc.rights Attribution 3.0 Unported es_CL
dc.rights.uri http://creativecommons.org/licenses/by/3.0/ es_CL
dc.subject.lcsh Macroeconomía es_CL
dc.subject.lcsh Tipo de cambio es_CL
dc.subject.lcsh Inflación -- Chile es_CL
dc.title External Shocks and Monetary Policy. Does it Pay to Respond to Exchange Rate Deviations? es_CL
dc.type Artículo es_CL

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