Exploring the role of the real exchange rate in Australian monetary policy

Dennis, R. (2003) Exploring the role of the real exchange rate in Australian monetary policy. Economic Record, 79(244), pp. 20-38. (doi:10.1111/1475-4932.00076)

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Abstract

An important issue in small open-economies is whether policymakers should respond to exchange rate movements when they formulate monetary policy. Micro-founded models tend to suggest that there is little to be gained from responding to exchange rate movements, and the literature has largely concluded that such a response is unnecessary, or even undesirable. This paper examines this issue using an estimated model of the Australian economy. In contrast to microfounded models, according to this model policymakers should allow for movements in the real exchange rate and the terms-of-trade when they set interest rates. Further, taking real exchange rate movements into account appears even more important with price level targeting than with inflation targeting.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Dennis, Professor Richard
Authors: Dennis, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Economic Record
Publisher:Wiley
ISSN:0013-0249
ISSN (Online):1475-4932

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