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Computational Economics

, Volume 32, Issue 3, pp 279–293 | Cite as

Optimal Exchange Rate Policy Under Unknown Pass-through and Learning With Applications to Korea

  • David Hudgins
  • C. W. Chan
Article

Abstract

The purpose of this analysis is to explore optimal monetary and exchange rate policy in continuous time when there is uncertainty in the exchange rate pass-through mechanism. Selecting official reserves as an operating target, optimal feedback control rules are derived using MATLAB Simulink under a stochastic linear-quadratic Gaussian specification with a Kalman observer approach to learning the differing pass-through expectations. The model is estimated using discrete time Korean data, which is transformed into the continuous time model where simulations are applied to the Korean economy.

Keywords

Exchange rate pass-through Quadratic performance index Kalman filter Observers 

JEL classifications

C61 C63 E37 E52 F37 F47 

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Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of OklahomaNormanUSA

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