Robust Taylor rules under heterogeneity in currency trade
- 80 Downloads
It is demonstrated in this paper that the exchange rate should be included in the Taylor rule when there is heterogeneity in currency trade to have a determinate and least squares learnable rational expectations equilibrium that also is desirable in an inflation rate targeting regime. Moreover, for certain Taylor rule parameterizations, these properties of the interest rate rule are robust against the degree of technical trading in currency trading.
KeywordsCurrency trade Determinacy Fundamental analysis Heterogeneity Inflation rate targeting Interest rate rule Least squares learning Technical analysis
JEL codesE52 F31
This paper has benefited from presentations at various conferences and seminars, and the authors acknowledge comments by Seppo Honkapohja, Karl-Gustaf Löfgren, Rajesh Singh, Tomas Sjögren, Jouko Vilmunen, Anders Vredin and three anonymous referees. The first author is also grateful to the OP Bank Group Foundation for a research grant. The usual disclaimer applies.
- Bask M (2007) Optimal monetary policy under heterogeneity in currency trade. Bank of Finland Research Discussion Paper 21/2007Google Scholar
- Bask M (2008) Adaptive learning in an expectational difference equation with several lags: selecting among learnable REE. European Financial Management 14:99–117Google Scholar
- Bullard J (2006) The learnability criterion and monetary policy. Federal Reserve Bank of St. Louis Review 88(3):203–217Google Scholar
- De Grauwe P, Grimaldi M (2006) The exchange rate in a behavioral finance framework. Princeton, New Jersey: Princeton University PressGoogle Scholar
- Friedman M (1953) The case of flexible exchange rates. In Essays in positive economics. Chicago, Illinois: University of Chicago PressGoogle Scholar
- Hommes CH (2006) Heterogeneous agent models in economics and finance. In: Tesfatsion L, Judd KL (eds) Handbook of computational economics, Volume 2: Agent-based computational economics. Elsevier/North-HollandGoogle Scholar
- Neely CJ (1997) Technical analysis in the foreign exchange market: a layman’s guide. Federal Reserve Bank of St. Louis Review 79(5):23–38Google Scholar
- Oberlechner T (2004) The psychology of the foreign exchange market. West Sussex, England: WileyGoogle Scholar
- Taylor JB (1999) A historical analysis of monetary policy rules. In: Taylor JB (ed) Monetary policy rules. Chicago, Illinois: University of Chicago PressGoogle Scholar
- Woodford M (2003) Interest and prices: foundations of a theory of monetary policy. Princeton, New Jersey: Princeton University PressGoogle Scholar