The Role of Exchange Rate in Monetary Policy (in Japanese)

Abstract

The relationship between currency exchange rate and monetary policy is becoming more imortant in today’s global economy. The goal of this paper is to simulate this relationship by using a two country New Keynesian model based on Clarida et al. (2002). In this paper, we add an exogenous shock to the growth rate of natural terms of trade so that we can describe economic fluctuations, such as terms of trade and the exchange rate changes more precisely. We show that whether or not the monetary authority should respond to exchange rate depends on what kind of structural shock causes the economic fluctuations. This implies that the monetary authority has to judge carefully and flexibly whether to respond to the exchange rate changing in accordance with various economic conditions.

Mitsuhiro Okano

Associate Professor of Economics

My research interests include monetary policy, new open economy macroeconomics and regional economics.