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Volume 58, Issue 3 -4

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Exchange Rate Management and Inflation Targeting: Modeling the Exchange Rate in Reduced-Form New Keynesian Models

Beneš, Jaromír; Hurník, Jaromír; Vávra, David

Year: 2008   Volume: 58   Issue: 3 -4   Pages: 166-194

Abstract: This paper introduces a strategy for modeling the exchange rate when the monetary authority targets inflation while also managing the exchange rate using interventions. It does so in the framework of a standard reduced-form New Keynesian model of monetary transmission used in many institutions for research, forecasting, and monetary policy analysis. We propose a micro-founded modification to the UIP condition which allows for modeling of informal exchange rate bands. Our modeling strategy is useful for most hybrid IT regimes, including those with imperfect control over market interest rates.

JEL classification: C51 E47 E52

Keywords: IT regimes, New Keynesian model, exchange rate, UIP

RePEc: http://ideas.repec.org/a/fau/fauart/v58y2008i3-4p166-194.html

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