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      Monetary policy responses to the exchange rate: Empirical evidence from the ECB

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      Author(s)
      Demir, İ.
      Date
      2014
      Source Title
      Economic Modelling
      Print ISSN
      0264-9993
      Publisher
      Elsevier
      Volume
      39
      Pages
      63 - 70
      Language
      English
      Type
      Article
      Item Usage Stats
      163
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      Abstract
      The exchange rate is an important part of the transmission mechanism in the determination of monetary policy because movements in the exchange rate have significant effect on the macroeconomy. It can be difficult to measure the reaction of monetary policy to the movements of the exchange rate, due to the simultaneous response of monetary policy to the exchange rate and the possibility that both variables respond to several other variables. This study addresses these problems by using an identification method based on the heteroscedasticity in the high-frequency data. The results in this paper suggest that the ECB systematically responds to exchange rate movements but that quantitative effects are small. Such a significant but small reaction coefficient seems consistent with the hypothesis that the central banks do not target the fluctuations in the exchange rate but consider them only to the extent they impact on the expected inflation and output path. © 2014 Elsevier B.V.
      Keywords
      European central bank
      Exchange rates
      Identification through heteroscedasticity
      Monetary policy
      Monetary policy reaction
      Permalink
      http://hdl.handle.net/11693/26565
      Published Version (Please cite this version)
      http://dx.doi.org/10.1016/j.econmod.2014.02.024
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