Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of “strict IT”, which imply a fully flexible exchange rate, or applying a “flexible IT”, which entails a de facto managed-floating exchange rate with foreign exchange (forex)...

In case of speculative attacks, the central banks' decisions to intervene or not to intervene seem to play an important role for the economic costs of currency crises. The central bank can either abstain from intervening or start an intervention, which in turn can be successful or unsuccessful....

A DSGE model is used to examine whether including the exchange rate in the central bank’s policy rule can improve economic performance. Smoothing the exchange rate helps both financially-robust economies and financially-vulnerable emerging economies in handling risk premium shocks and, given a...

Central banks' international reserve holdings have increased significantly in the recent past. While traditional models fail to explain this accumulation of reserves, the more recent literature argues that reserves are used as a lifejacket against financial crises. However, research so far has...

Though the hypothesis that exchange rate regimes fully predetermine monetary policy in the face of external shocks hardly finds any advocates in the field of theory, it has crept into empirical research. This study adopts a careful and rigorous empirical approach that looks at monetary policy...

We develop a stochastic two-country general equilibrium model, where prices are determined under conditions of monopolistic competition to examine the macroeconomic and welfare effects of tariffs on the world economy under alternative nominal rigidities: producer-currency pricing (PCP) and...

One of the reasons for governments to employ capital controls is to obtain some degree of monetary independence. In this paper we test whether capital controls can reduce the link between exchange rates fluctuations and cross border interest differentials. Recent capital control proxies are used...

This paper examines the duration of fixed exchange rate regimes and investigates whether there is a certain pattern of time dependence in the survival rate of pegged exchange rate regimes for emerging economies. We query why some fixed regimes last longer and determine the macroeconomic, social...

Most of the currency literature investigates the risk and return characteristics of the currency carry trade after the collapse of the Bretton Woods system. In order to gauge the long-term currency carry premium, we extend the sample to 20 currencies over the period 1900 to 2012. We find modest...

This paper identifies the Canadian–US equilibrium exchange rate based on a simple structural model of the real exchange rate, in which monetary policy follows a Taylor-rule interest rate reaction function. The exchange rate is explained by relative output and inflation as observable variables,...