Working Paper: NBER ID: w10995
Authors: Charles Engel; Kenneth D. West
Abstract: We explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate. The interest rate rule, in conjunction with some standard assumptions, implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials. The weights are functions of the parameters of the interest rate rule. An initial look at German data yields some support for the model.
Keywords: No keywords provided
JEL Codes: F41; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deviation of the real exchange rate from its steady state (F31) | present value of inflation and output gap differentials (E31) |
| interest rate (it) (E43) | real exchange rate (qt) (F31) |
| real exchange rate (qt) (F31) | adjusted inflation (bt) and output (yt) differentials (E31) |
| high German inflation (N14) | stronger mark (L10) |
| model-based real exchange rate (F31) | actual exchange rate movements (F31) |