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Monetary Policy Rules And Foreign Currency Positions

Date Added: Oct 2010
Format: PDF

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. The authors 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. They 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-neighbor in a money growth targeting regime.