صفحه اصلی بایاس، نرخ مبادله قطع و سیاست نرخ ارز مطلوب

This paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations. The paper first demonstrates, in a two-country Dynamic Stochastic General Equilibrium (DSGE) model, that home bias in consumption is important to replicate the exchange rate volatility and exchange rate disconnect documented in the data. When home bias is high, the shock to Uncovered Interest rate Parity (UIP) can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables, such as GDP, almost untouched. The model predicts that the volatility of the real exchange rate relative to that of GDP increases with the extent of home bias. This relation is supported by the data. A second-order accurate solution method is employed to find the optimal operational monetary policy rule. Our model suggests that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations. In particular, when the central bank does not take a strong stance against the inflation rate, exchange rate stabilization may induce substantial welfare loss. The model does not detect welfare gain from international monetary cooperation, which extends Obstfeld and Rogoff's [Obstfeld, M., Rogoff, K.,2002. Global implications of self-oriented national monetary rules, Quarterly Journal of Economics May, 503–535] findings to a DSGE model.

Many countries adopted a monetary policy regime defined by John Taylor as a trinity: (1) a flexible exchange rate, (2) an inflation target, and (3) a monetary policy rule. John Taylor (2001) argues that the role of the exchange rate in the monetary policy rule is an important issue for this new policy regime. In this paper we first show that home bias in consumption can help to replicate two findings in the data: 1. Exchange rates are much more volatile than other macroeconomic variables such as GDP (exchange rate volatility); 2. The volatility of output does not respond to the volatility of exchange rates (exchange rate disconnect). Under this explanation of exchange rate volatility and disconnect, our model suggests that the central bank should not vigorously stabilize the real exchange rate in its monetary policy rule. There are two different strands of literature focusing upon exchange rate stabilization. The first one studies the tradeoff between exchange rate stabilization and the stability of the whole economy. Ball (1999) and Svensson (2000) find that the inclusion of the exchange rate into a monetary policy rule can stabilize output or inflation, or both. In contrast, Obstfeld and Rogoff (1995) warn policymakers that the required interest rate changes for exchange rate stabilization can aggravate instability elsewhere in the economy. In an empirical study on New Zealand, West (2004) finds that exchange rate stabilization would increase the volatility of output, inflation, and the interest rate. Another strand of literature uses welfare-based New Open-Economy Macroeconomic (NOEM) models to study the tradeoff between real exchange rate stabilization and the expenditure-switching effect.1 Though elegant in allowing for analytical solutions, these NOEM models are usually static with no price persistence, and are therefore unable to address the tradeoff considered in the first strand of literature. Kollmann (2004) incorporates the tradeoffs in both strands of literature into a two-country Dynamic Stochastic General Equilibrium (DSGE) model. He compares the welfare effects of the exchange rate policy in a sticky-price dynamic model. Our paper is closely related, but we emphasize the connection between home bias in consumption and the exchange rate disconnect puzzle. Several authors have recently used pricing in the importer's currency (Local Currency Pricing, or LCP) to model the low exchange rate pass-through documented in the data.2 The short-run exchange rate pass-through into import prices is close to zero in those models. In industrial countries, although the pass-through into consumer prices is low, there is still a sizable short-run exchange rate pass-through into import prices.3 In addition, the LCP in import prices is also criticized by Obstfeld and Rogoff (2000b) on the grounds that it generates counterfactual correlation between the exchange rate and the terms of trade. Therefore, in this paper, we follow Devereux and Engel (2007) by assuming that the imports and exports are priced in the producer's currency (Producer Currency Pricing, or PCP), but final goods are priced in the consumer's currency. We further assume that both import prices and consumer prices are sticky. When those prices are fixed in the short-run, the import prices in the importer's currency vary with the exchange rate, but the consumer prices do not fluctuate with the exchange rate. In this way, our model allows a low exchange rate pass-through into consumer prices and a relatively high pass-through to import prices. Under this setup, we find that home bias in consumption is critical for our model to replicate the well-documented disconnect between exchange rates and real macroeconomic variables.4 We follow Devereux and Engel (2002) and Kollmann (2004) by using the Uncovered Interest rate Parity (UIP) shock to generate fluctuations in the nominal exchange rate. However, Devereux and Engel (2002) use the LCP for import prices to insulate the economy from exchange rate fluctuations. After we allow the exchange rate movements to pass through into the import prices, we find that only when the foreign market is a small portion of total output could the UIP shock in the financial market substantially increase the volatility of the exchange rate while keeping the volatility of real variables, such as GDP, almost unchanged. The multiple price-stickiness used in this paper also helps us in two additional ways. First, it helps to replicate that the cyclical behavior of CPI inflation generally differs from that of PPI inflation in the data. The latter is typically more volatile and less persistent than the former.5 More importantly, the multiple price-stickiness incorporates into our model a new tradeoff in the exchange rate policy discussed by Devereux and Engel (2007): when prices of both imports and final consumption goods are sticky, the flexible exchange rate facilitates the expenditure-switching effect for imports and exports, but distorts the prices of final consumption goods across countries. Based on the fact that the expenditure-switching effect is empirically weak, they argue, the exchange rate should be stabilized to eliminate price distortions for final consumption goods. We can investigate the quantitative importance of this tradeoff in a model with home bias in consumption. We limit our search for the optimal exchange rate policy to a class of simple operational policy rules. Our benchmark model suggests a very weak stance on exchange rate stabilization. Given that the central bank strongly stabilizes the inflation rate, the extra gain from exchange rate stabilization is negligible. Intuitively, the real exchange rate volatility in our model is primarily driven by home bias in consumption and the Uncovered Interest rate Parity (UIP) shock. The similarity between home and foreign final consumption bundles is low when consumption is highly biased toward domestic goods. Therefore, the CPI-based real exchange rate fluctuations do not necessarily imply significant price distortions across countries. In this case, the gain from exchange rate stabilization is small. However, the restriction on exchange rate flexibility obstructs the terms of trade adjustment for intermediate goods. What's more, movements of the interest rate required for exchange rate stabilization induce prolonged deviations of the inflation rate from its steady-state level, which also lowers welfare. In addition, we find that exchange rate stabilization may induce substantial welfare loss if the central bank takes a weak stance against the inflation rate. When the central bank takes a weak stance on inflation stabilization, aggressively stabilizing the real exchange rate will transmit exchange rate fluctuations into large and prolonged inflation fluctuations through the tradeoff between exchange rate and inflation stabilization. In our model, this policy could be very detrimental. We also find that international monetary cooperation does not generate significant welfare gain compared to the Nash equilibrium. This result extends the analysis of Obstfeld and Rogoff (2002) to a more complicated DSGE model. When both country-specific productivity shocks and price-stickiness exist in an open-economy macro model with imperfect international risk sharing, policymakers may have to strike a balance between mitigating international risk sharing and sticky-price distortions. Obstfeld and Rogoff (2002) discuss this tradeoff thoroughly by deriving an analytical solution to a static New Open-Economy Macroeconomic (NOEM) model. They show that the welfare gain from international monetary cooperation is small. We find similar results in this paper. This finding may reflect the fact that the gain from international risk sharing is usually found to be small in open-economy macroeconomic models.6 Compared to Obstfeld and Rogoff's (2002) model with static price setting, deviating from flexible price equilibrium is more costly in our model with Calvo-style price setting: it induces price dispersions. The Nash equilibrium and international cooperation coincide if the cost of price dispersions exceeds the benefit from international risk sharing. As the degree of home bias decreases, we find it is more desirable to stabilize the real exchange rate.7Kollmann (2004) and Leith and Wren-Lewis (2006) find similar results. However, we want to be cautious in interpreting this result as offering support for exchange rate stabilization. In the case with little home bias, the volatility of the real exchange rate relative to that of GDP is much smaller than what is observed in the data. In addition, the disconnect between exchange rate and output volatilities exists only when the home bias is high. Intuitively, when the foreign market is only a very small portion of output (high home bias), the UIP shock in the financial market can drive up exchange rate volatility, but has very limited impact on output. In this sense, our model provides an interesting solution to the exchange rate disconnect puzzle: home bias in consumption.8 Our results are consistent with Hau's (2002) finding that the volatility of the real exchange rate is positively correlated with the level of home bias. We confirm this finding in our data. In addition, our model also predicts that there is an even stronger relation between the extent of home bias and the volatility of the real exchange rate relative to the volatility of GDP. We find empirical support for this prediction in our OECD-country data as well. Our benchmark model suggests that the central bank should not include the real exchange rate in its policy rule. This finding is robust under the preference of habit persistence, though the welfare cost of exchange rate variability is higher under habit persistence.9 When household preferences are more risk sensitive, welfare loss is higher for given exchange rate variability. However, this does not guarantee that central banks should react to exchange rate variation. The cost of real exchange rate stabilization is also higher under habit persistence. Our model shows that the cost still exceeds the benefit for real exchange rate stabilization in this case. In this paper, we take home bias in consumption as exogenously given. However, Helpman (1999) argues that there is no clear evidence for such demand patterns. Our treatment of home bias can be taken as a shortcut for a model with no home bias in consumption but with high international trade costs, such as the model in Atkeson and Burstein (2005). Burstein, Neves, and Rebelo (2003) find a trade cost that is large enough to generate the same home bias level as in our model, even after controlling for nominal exchange rate fluctuations. The trade-depressing effect of exchange rate volatility is more plausible for low-frequency movements of the exchange rate for which hedging strategies are unavailable.10 We doubt this effect would be strong enough to overturn our results at business cycle frequencies. We want to emphasize that our paper is not about the optimal choice of exchange rate regimes. We limit our discussion to a flexible exchange rate regime and study if the central bank should include the exchange rate in its monetary policy rule. Our model has abstracted away from several benefits of an exchange rate peg. Governments may decide to adopt a peg because it may stimulate international trade, eliminate competitive devaluations, and impede exchange rate speculation.11Kollmann (2004) finds that a monetary union (an extreme case of a peg) can raise welfare because it eliminates UIP shocks. In this paper, we assume that the UIP shocks do not respond to monetary policy under a flexible exchange rate regime. We admit that our results may depend on the interaction between exchange rate stabilization and the volatility of UIP shocks. Incorporating this interaction requires a model that can endogenously generate the UIP puzzle and exchange rate volatility. We leave this for future research. We also abstract from tradability and trade frictions in our model. Leith and Wren-Lewis (2006) argue that exchange rate movements may cause a large misalignment between tradable and nontradable sectors. They find, in a model with both tradable and nontradable sectors, that this misalignment provides an additional incentive for the central bank to stabilize the exchange rate, though as in our model, they find the gain of exchange rate stabilization is small. Kumhof, Laxton, and Naknoi (2008) show that the exchange rate enters the optimal policy rule in a model in which firms enter and exit foreign markets when the exchange rate fluctuates. Empirical studies on the impacts of business cycle frequency fluctuations of the exchange rate on firms' exporting decisions may be fruitful for future research. Our benchmark model suggests that the monetary authority should not seek to stabilize the real exchange rate. This result should depend on the way in which the exchange rate is modeled. There is no consensus among economists on exchange rate determination. For instance, Chari, Kehoe, and McGrattan (2002) and Devereux and Engel (2002) attribute exchange rate volatility to nominal stickiness. In contrast, this volatility is mainly driven by home bias in final consumption bundles in Atkeson and Burstein, 2005 and Ghironi and Melitz, 2005, and our model in this paper. Naknoi (2008) argues that exchange rate fluctuations are also affected by the endogenous tradability of goods. Further research is desirable to determine how robust our policy suggestion is in different models of exchange rate determination. The remainder of the paper is organized as follows: Section 2 lays out the theoretical model; Section 3 provides details about calibration and compares the business cycle statistics of our model with those in the data; Section 4 discusses the solution method and presents our findings for policy evaluation; and Section 5 concludes and discusses potential future research directions.

In this paper, we examine how much the interest rate should react to real exchange rate fluctuations in a two-country DSGE model. In our model the exchange rate volatility is mainly driven by home bias in consumption and the UIP shock to the exchange rate. Our results suggest a very loose stance against exchange rate stabilization. In particular, when the central bank does not take a strong stance against the inflation rate, the inclusion of the exchange rate into the monetary policy rule may induce significant welfare loss. We also find that there is no welfare gain from international monetary cooperation, which extends Obstfeld and Rogoff's (2002) findings to a DSGE model. We show that to match some other important empirical regularities, home bias in consumption is crucial for a model to replicate exchange rate volatility and exchange rate disconnect. We find support in the data for our explanation of the exchange rate disconnect puzzle. Our policy evaluations are admittedly contingent on the assumption that real exchange rate volatility is mainly driven by home bias and the exchange rate shock. Though home bias in consumption can be justified by a more carefully structured model with high international trade costs, we could explore in more details the microstructure of the UIP shock, and how this shock interacts with the exchange rate policy. Since our results also show the extent of home bias has important implications for exchange rate policy, it is also desirable for future research to test whether the optimal exchange rate policy varies with assumptions that drive exchange rate volatility in the model.