International Economics and Economic Policy

, Volume 6, Issue 3, pp 283–313 | Cite as

Robust Taylor rules under heterogeneity in currency trade

Original Paper

Abstract

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.

Keywords

Currency trade Determinacy Fundamental analysis Heterogeneity Inflation rate targeting Interest rate rule Least squares learning Technical analysis 

JEL codes

E52 F31 

Notes

Acknowledgement

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.

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Copyright information

© Springer-Verlag 2009

Authors and Affiliations

  1. 1.Department of Economics and StatisticsÅbo Akademi UniversityTurkuFinland
  2. 2.Department of EconomicsUmeå UniversityUmeåSweden

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