Continuos credibility effects are incorporated into a simple model of optimal monetary policy. The resulting model provides explanations for a number of folk theorems about credibility in monetary policy. A central bank with low initial credibility pursues a more restrictive policy than a...

In an attempt to move beyond the purchasing power parity hypothesis, this paper studies two issues. First, the causes of movements of real exchange rates are investigated. In contrast to the typical result, supply shocks are found to dominate the long-run variance decompositions for all...

Previous studies of the sources of real exchange rate fluctuations have concluded that real demand shocks account for the bulk of the movements in real exchange rates. In this paper, bilateral real exchange rates between the US, the UK, Germany and Japan are investigated using a statistical...