Exchange rate and price dynamics at the zero lower bound : conference paper

Kaufmann, Daniel; Bäurle, Gregor

In this paper, we analyse nominal exchange rate and price dynamics after risk shocks with short-term interest rates constrained by the zero lower bound (ZLB). We show with a stylized theoretical model that temporary risk shocks may lead to permanent shifts of the exchange rate and the price level if a central bank anchors long-run inflation expectations. In line with this theoretical prediction, we find empirical evidence for Switzerland, that the responses of the exchange rate and the price level to a temporary risk shock are permanent. Our theoretical discussion shows that adopting a credible long-run price level target rather than a long-run inflation target avoids these permanent shifts of the exchange rate and the price level.

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Year of publication:	2013
Authors:	Bäurle, Gregor ; Kaufmann, Daniel
Published in:	Beiträge zur Jahrestagung des Vereins für Socialpolitik 2013: Wettbewerbspolitik und Regulierung in einer globalen Wirtschaftsordnung Session: Exchange rates ; V3
Publisher:	[Kiel : ZBW
Subject:	Exchange rate and price dynamics \| Zero lower bound on interest rates \| Small open-economy DSGE model \| Monetary policy strategy \| Monetary transmission \| Bayesian VAR \| Sign restrictions \| Geldpolitik \| Monetary policy \| Niedrigzinspolitik \| Low-interest-rate policy \| Geldpolitische Transmission \| VAR-Modell \| VAR model \| Wechselkurs \| Exchange rate \| Theorie \| Theory \| Schock \| Shock \| Zins \| Interest rate \| Preisrigidität \| Price stickiness