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Working Paper
The Global Factor in Neutral Policy Rates : Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination
This paper highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. Using a standard two country DSGE model, we derive a structural decomposition in which the nominal exchange rate is a function of the expected present value of future neutral real interest rate differentials plus a business cycle factor and a PPP factor. Country specific ?r*? shocks in general require optimal monetary policy to pass these through ...