Optimal monetary policy with a regime-switching exchange rate in a forward-looking model

We evaluate the macroeconomic performance of di¤erent monetary policy rules when there is exchange rate uncertainty. We do this in the context of a non-linear rational expectations model. The exchange rate is allowed to deviate from its fundamental value and the persistence of the deviation is modelled as a Markov switching process. Our results suggest that taking into account the switching nature of the economy is important only in extreme cases.Fundação para a Ciência e a Tecnologia (FCT) - POCI/EGE/56054/2004