Monetary Policy Rules and Foreign Currency Positions

51 Pages Posted: 1 Nov 2010

See all articles by Bianca De Paoli

Bianca De Paoli

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Hande Küçük

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); Central Bank of Turkey-Monetary Policy and Research Department

Jens Sondergaard

Bank of England - Monetary Analysis

Date Written: October 28, 2010

Abstract

Using an endogenous portfolio choice model, this paper examines how different monetary policy regimes can lead to different foreign currency positions by changing the cyclical properties of the nominal exchange rate. We find that strict inflation-targeting regimes are associated with a short position in foreign currency, while the opposite is true for non inflation targeting regimes. We also explore how these different external positions affect the international transmission of monetary shocks through the valuation channel. When central banks follow inflation-targeting Taylor-type rules, valuation effects of monetary expansions are beggar-thy-self, but they are beggar-thy-neighbour in a money growth targeting regime (or when monetary policy puts weight on output stabilisation).

Keywords: Portfolio Choice, International Transmission of Shocks, Monetary Policy

JEL Classification: F31, F41

Suggested Citation

De Paoli, Bianca and Kucuk-Tuger, Hande and Sondergaard, Jens, Monetary Policy Rules and Foreign Currency Positions (October 28, 2010). Bank of England Working Paper No. 403, Available at SSRN: https://ssrn.com/abstract=1701163 or http://dx.doi.org/10.2139/ssrn.1701163

Bianca De Paoli (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Hande Kucuk-Tuger

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Central Bank of Turkey-Monetary Policy and Research Department ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

Jens Sondergaard

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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