Exchange Rate and Price Dynamics at the Zero Lower Bound

Daniel Kaufmann and Gregor Bäurle
Authors registered in the RePEc Author Service: Gregor Bäurle ()

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: 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.

JEL-codes: C32 E31 E52 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79872

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