63368886X dc bibtex

Stabilizing rational speculation and price level targeting / Franco Reither; Lars Bennöhr

Reither, Franco *1945-2014* ; Bennöhr, Lars

Englisch

Hamburg : Helmut-Schmidt-Univ., 2010

Online-Ressource (17 S. = 436 KB, Text) : graph. Darst.

Systemvoraussetzungen: Acrobat Reader

Druckausg.: Stabilizing rational speculation and price level targeting. - Hamburg : Helmut-Schmidt-Univ., 2010. - 17 S

URN: urn:nbn:de:gbv:705-opus-26293

Handle: 10419/66041

Wechselkurs / Overshooting / Währungsspekulation / Rationale Erwartung / Monetäre Wechselkurstheorie / Geldmenge / Schock / Inflationssteuerung / Devisenmarkt / Gleichgewichtsmodell / Theorie

Arbeitspapier / Working paper / Online-Publikation / Online-publication

Journal of Economic Literature: E44 ; F31 ; F41

We analyze the contribution of speculation to exchange rate volatility using different assumptions regarding speculation strategies and monetary policy rules. We take the DORNBUSCH (1976) model as the starting point and adopt a slight modification of the money demand specification. With a money supply rule, rational speculation dampens the overshooting of the exchange rate following a money supply shock, compared with speculation based on static expectations. Then, we replace the LM condition by a TAYLORtype price level targeting rule rule. The resulting DORNBUSCH-TAYLOR model generates a unique saddle point solution even under strict inflation targeting, if speculation is based on rational expectations. Under flexible inflation targeting, exchange rate overshooting induced by a monetary policy shock is less pronounced under rational speculation than under static speculation. FOREX market equilibrium doesnt exist at all if speculation is static and monetary policy adoptsstrict inflation targeting. -- Fair rational expectations ; DORNBUSCH Model ; open economy macroeconomics ; speculation ; FOREX