The Empirics of Monetary Policy Rules in Open Economies

This paper was prepared as a Keynote Address for the ESRC Conference on the Future of Macroeconomics held at the Bank of England Conference Center on April 14, 2000. It uses the empirical framework for formulating and estimating forward looking monetary policy rules developed in Clarida, Gali, Gertler (1998; 1999; 2000;2001) and Clarida (2000) to assess what we know, don't know, and can't tell about monetary policy making in an open economy with an (implicit) inflation target. Among the issues discussed are: the relationship between structural VAR models of monetary policy and exchange rates and estimates of forward looking Taylor rules; the relationship between inflation targeting and leaning against the (exchange rate) wind; why central bankers are averse to even wide - band target zones; quantifying that stresses and costs of a one size fits all monetary policy for the members of a monetary union or currency bloc.