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Abstract for:

Monetary Policy Rules and Foreign Currency Positions

Bianca  De Paoli,  Hande  Küçük-Tuger,  Jens  Søndergaard,  November 2010
Paper No' CEPDP1022: | Full paper (pdf)
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Keywords: Portfolio choice; international transmission of shocks, monetary policy

JEL Classification: F31; F41

Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: CEP Discussion Papers
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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. We find that strict inflation targeting regimes are associated with a short position in foreign currency, while the opposite is true for noninflation targeting regimes. We 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-neighbour in a money growth targeting regime (or when monetary policy puts weight on output stabilization).