Policy Responses to Exchange-Rate Movements
This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or commodity prices. The paper compares the model's prescriptions to the policies of an actual central bank, the Bank of Canada. Finally, the paper considers the role of fiscal policy in an open economy. Coordinated fiscal and monetary responses to exchange-rate movements stabilize output at the sectoral as well as aggregate level.
I am grateful for research assistance from Connor Larr and for suggestions from economists at the Bank of Canada. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Laurence Ball, 2010. "Policy Responses to Exchange-rate Movements," Open Economies Review, Springer, vol. 21(2), pages 187-199, April. citation courtesy of