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Monetary policy in an equilibrium portfolio balance model
Kumhof, Michael (Author), Nieuwerburgh, Stijn van (Author)

URLURL - Presentation file, Visit http://www.imf.org/external/pubs/ft/wp/2007/wp0772.pdf New window

Abstract
Standard theory shows that sterilized foreign exchange interventions do not affect equilibrium prices and quantities, and that domestic and foreign currency denominated bonds are perfect substitutes. This paper shows that whenfiscal policy is not sufficiently flexible in response to spending shocks,perfect substitutability breaks down and uncovered interest rate parityno longer holds. Government balance sheet operations can be used as an independent policy instrument to target interest rates. Sterilized foreign exchange interventions should be most effective in developing countries, wherefiscal volatility is large and where the fraction of domestic currency denominated government liabilities is small.

Language:English
Keywords:ekonomska politika, monetarna politika, fiskalna politika, finančni trg, devize, valuuta, plačilna bilanca, portfolio, modeli, economic policy, monetary policy, fiscal policy, financial market, foreign exchange, balance of payments, portfolio, models
Work type:Not categorized (r6)
Organization:EF - Faculty of Economics
Year:2007
Publisher:International Monetary Fund
Number of pages:31 str.
Place:Washington
UDC:339.7
COBISS.SI-ID:17271782 Link is opened in a new window
Views:388
Downloads:178
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