Currency Misalignments and Optimal Monetary Policy: A Reexamination

@inproceedings{Engel2011CurrencyMA,
  title={Currency Misalignments and Optimal Monetary Policy: A Reexamination},
  author={Charles M. Engel},
  year={2011}
}
This paper examines optimal monetary policy in an open-economy two-country model with sticky prices. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target not only inflation and the output gap, but also the currency misalignment. However the interest rate reaction function that supports this targeting rule may involve only the CPI inflation rate. This result illustrates how examination of "instrument rules" may hide important trade… CONTINUE READING

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