New study shows exchange rate can stabilize economy better than interest rates!
The article explores using the exchange rate as a tool to stabilize the economy instead of interest rates. By analyzing different monetary policy rules, the researchers found that using the exchange rate can be more effective in reducing fluctuations in both output and inflation. This approach works better for more open economies and those less affected by interest rate changes. The key factors driving the differences between the rules are the paths of the exchange rate and interest rate, as well as variations in the risk premium over time.