Open Access
Exchange rate misalignment and external imbalances : what is the optimal monetary policy response?
Loading...
Files
RSC_2022_71.pdf (740.05 KB)
Full-text in Open Access
License
Attribution 4.0 International
Cadmus Permanent Link
Full-text via DOI
ISBN
ISSN
1028-3625
Issue Date
Type of Publication
LC Subject Heading
Other Topic(s)
EUI Research Cluster(s)
Initial version
Published version
Succeeding version
Preceding version
Published version part
Earlier different version
Initial format
Citation
EUI RSC; 2022/71; Pierre Werner Chair Programme on Monetary Union
Cite
CORSETTI, Giancarlo, DEDOLA, Luca, LEDUC, Sylvain, Exchange rate misalignment and external imbalancesāÆ: what is the optimal monetary policy response?, EUI RSC, 2022/71, Pierre Werner Chair Programme on Monetary Union - https://hdl.handle.net/1814/75061
Abstract
How should monetary policy respond to excessive capital inflows that appreciate the currency, widen the external deā¦cit and cause overheating? Using the workhorse open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities reduce the ERPT. Excessive capital inflows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand.