Optimal Exchange Rate Policy Under Unknown Pass-through and Learning With Applications to Korea
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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.
KeywordsExchange rate pass-through Quadratic performance index Kalman filter Observers
JEL classificationsC61 C63 E37 E52 F37 F47
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