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Title: The Complex Reaction of Monetary Policy to the Exchange Rate
Authors: Kharel, RS
Martin, C
Milas, C
Keywords: Monetary policy;Asset prices;Nonlinearity
Issue Date: 2006
Publisher: Brunel Business School
Citation: Brunel Business School, Economics and Finance Working Papers, 06/27, Sep 2006
Series/Report no.: Economics and Finance Working Papers;06/27
Abstract: We estimate a flexible non-linear monetary policy rule for the UK to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under-valuations of more than 4% and over-valuations of more than 5%. Third, the response of policymakers to inflation is smaller when the exchange rate is over-valued and larger when it is under-valued. None of these responses is allowed for in the widely-used Taylor rule, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper.
Appears in Collections:Business and Management
Economics and Finance
Brunel Business School Research Papers

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