Robust Taylor rules under heterogeneity in currency trade
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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.
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