Working Paper: NBER ID: w15173
Authors: Laurence M. Ball
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift in capital flows (F32) | optimal monetary policy response (reduce interest rates) (E52) |
| shift in net exports (F29) | optimal monetary policy response (increase interest rates) (E52) |
| rise in demand for manufactured exports (F14) | optimal monetary policy response (tightening of policy) (E63) |
| rise in commodity prices (Q02) | optimal monetary policy response (ambiguous) (E63) |
| coordinated fiscal and monetary policy responses (E63) | economic stability (E63) |