Open Economies Review

, Volume 21, Issue 2, pp 187–199 | Cite as

Policy Responses to Exchange-rate Movements

Research Article

Abstract

This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or commodity prices. The paper compares the model’s prescriptions to the policies of an actual central bank, the Bank of Canada. Finally, the paper considers the role of fiscal policy in an open economy. Coordinated fiscal and monetary responses to exchange-rate movements stabilize output at the sectoral as well as aggregate level.

Keywords

Exchange rates Monetary policy Bank of Canada 

JEL Classification

E52 E63 F41 

References

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Johns Hopkins UniversityBaltimoreUSA

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