Calculating the Long-Run Equilibrium Home Policy Rate

Long-Run Constraints on Monetary Policy Autonomy in a FlexIT Regime

Long-Run Monetary Policy in an Open Economy

Consider two countries, A and B, both operating with flexible exchange rates and inflation-targeting monetary policies. Country A has an inflation target of 5%, while Country B has an inflation target of 2%. If Country B's nominal interest rate is currently 3%, what would be the approximate nominal interest rate in Country A, assuming the economies are in a long-run equilibrium where financial market expectations have fully adjusted?

Evaluating a Central Bank's Policy Claim

In a long-run equilibrium between two countries with flexible exchange rates and inflation-targeting policies, it is possible for the home country to maintain a nominal interest rate 5% higher than the foreign country while simultaneously achieving a stable exchange rate (zero expected depreciation), even if its inflation target is only 2% higher than the foreign country's.

In the context of a long-run equilibrium between two economies with flexible exchange rates and inflation-targeting central banks, match each economic differential to its corresponding role or equivalent value.

Explaining Long-Run Interest Rate and Inflation Linkages

Consider two countries, the home country and a foreign country, both operating under flexible exchange rate and inflation-targeting regimes. The home country has a nominal interest rate of 7% and an inflation target of 5%. The foreign country has a nominal interest rate of 4% and an inflation target of 2%. Assuming both economies are in a long-run equilibrium where financial markets have fully adjusted, the home currency is expected to depreciate by approximately ____% per year.

Imagine a home country is in a stable, long-run equilibrium with a foreign country. Both countries have flexible exchange rates and inflation-targeting central banks. The home country's central bank then credibly announces and implements a permanent reduction in its long-term inflation target. Arrange the following market and policy adjustments in the logical sequence that would lead to a new long-run equilibrium.

Assessing Exchange Rate Sustainability

Consider two economies, Northland and Southland, both with flexible exchange rates and independent central banks that target inflation. Northland's central bank has set its policy interest rate at 8% and maintains a long-term inflation target of 6%. Southland's central bank has set its policy interest rate at 3% and maintains a long-term inflation target of 2%. Assuming international financial markets are fully integrated, which of the following statements best analyzes the long-run sustainability of this situation?