Throughout this paper the author went through the consequences of monetary policy on the exchange rate. The author did this by using a standard two country model that was based on the Obstfeld-Rogoff model. One of the main assumptions that were made was that central banks would change monetary policy if inflation strays from the target levels. Which basically means central banks are expected to react to changes in the inflation rate. When setting up the country size and market structure of the home and foreign countries, a utility function was used to illustrate the preferences. Another was used to represent the budget constraints for both countries. He then constructed a production function for the domestic firm and created a price setting equation. The paper then goes into the money supply shock versus a shock to the monetary rule. He found that there was an undershooting of the nominal exchange rate which would mean that there is a weaker disbursement in the short run. The author also took a look at sensitivity analysis and found that the changes in the parameter values or the estimated values does not have any qualitative changes on the model. Overall when using the Obstfeld-Rogoff model he found that monetary policy rules could possibly be a reason why exchange rates tend to be fairly low at times.
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