Does The Exchange Rate Belong In Monetary Policy Rules? New Answers From a DSGE Model With Endogenous Tradability And Trade Frictions

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Executive Summary

This paper develops a 2-region DSGE model that integrates the theory of comparative advantage or endogenous tradability into a monetary model with nominal and real rigidities. The author fined that without endogenous tradability and trade frictions there is no role for the exchange rate in optimized monetary policy rules. But with endogenous tradability and trade frictions the exchange rate can play a much more fundamental role in facilitating or slowing down adjustments in the real economy, and it enters the optimized policy rule.

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