Optimal Monetary Policy with a Regime-Switching Exchange Rate
in a Forward-Looking Model
We evaluate the macroeconomic performance of different monetary policy rules when there is exchange rate uncertainty. We do this in the context of a non-linear rational expectations model. The exchange rate is allowed to deviate from its fundamental value and the persistence of the deviation is modeled as a Markov switching process. Our results suggest that taking into account the switching nature of the economy is important only in extreme cases.
JEL Classification: E52, E58, F41.
Keywords: Exchange Rates, Monetary Policy, Markov Switching.