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Title: |
Asymmetric Central Bank Reaction Functions: An
Application of Smooth Transition Regression |
| Author: |
Denny, Kevin J. |
| Author
Affiliation: |
U College
Dublin and Institute for Fiscal Studies London |
| Source: |
International Economic Journal, Winter 2001, v. 15, no. 4, pp. 23-32 |
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Publication Date: |
Winter 2001 |
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Abstract: |
This paper estimates a simple model of
exchange rate policy where the Central Bank optimises an objective
function which takes into account competitiveness, its commitment to the
EMU and the cost of adjustment. We allow for asymmetry in government
behaviour whereby a key parameter, the marginal adjustment cost of the
effective exchange rate, takes on a continuum of values depending on the
value of the DeutscheMark/Irish pound exchange rate. It is shown that
the adjustment cost parameter is decreasing in either the level of or
the rate of change of the DM rate suggesting that the authorities
display greater aversion to exchange rate fluctuations as the domestic
currency weakens. |
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