What are the implications of targeting different measures of inflation? We extend a basic theoretical framework of optimal monetary policy under inflation targeting (Svensson 1997) to include several components of CPI inflation, and analyze the implications of using different measures of...

According to economic theory, the capital inflows reversal – so-called sudden stop – has a significant negative effect on economic growth. This paper investigates the direct impact of current account reversals on growth in Central and Eastern European countries. Two steps to conduct the...

This paper attempts to carry out a study of relative importance of anticipated and unanticipated external crises for the dynamics of economic growth. The estimations are carried out within a two equation system capturing the possibility of a common shock to external crises and growth. The effect...

The equilibrium exchange rate is a closely scrutinized variable in international finance and monetary economics. A model to estimate an equilibrium exchange rate is proposed in this paper. It consists of several building blocks: a state-space structure, uncovered interest parity and the...

We investigate the theory and empirics of currency substitution and currency complementarity. Analytical tractability is facilitated by focussing on a small currency. Data spanning 1985 to the turn of the century contain evidence of the Australian dollar’s substitution for the mark and...

This paper investigates possible contribution of third-currency effects to exchange rate movements. It reopens the subject of currency substitution and examines whether the third-currency effects change when the third-currency is a complement as opposed to when it is a substitute for currencies...

This paper investigates effects of third-currency monetary policy shocks on exchange rates. For this purpose we setup a structural VAR model containing the exchange rates of the three major currencies – the U.S. dollar, the euro and the Japanese yen – and short-term interest rates on the...

An attempt to quantify possible negative effects of external crises in emerging market economies is made in this paper. The direct and indirect effects of the external crises, here sudden stops in capital flows and currency crises, are estimated and compounded into composite overall effects. In...

The ECB recommends to prospective euro-area members that they choose the central parities, for fixing their currencies against the euro, consistent with a broad range of economic indicators while taking account of the market rate as well. In this paper, we estimate a behavioral model of the real...

An exchange rate between two currencies can be materially affected by shocks emerging from a third country. A US demand shock, for example, can affect the exchange rate between the euro and the yen. Because positive US demand shocks have a greater positive impact on Japanese interest rates than...