A DSGE model is used to examine whether including the exchange rate in the central bank’s policy rule can improve economic performance. Smoothing the exchange rate helps both financially-robust economies and financially-vulnerable emerging economies in handling risk premium shocks and, given a...

It is widely agreed that a fiscal rule should boost discipline and credibility. A rule should also reduce macroeconomic volatility and be easily understood. Toward such ends, a government may run structural surpluses. In so doing, the government accumulates a precautionary cushion of assets on...