02418cas a2200313 a 4500 AALejournalIMF022948 230101c9999 xx r poo 0 0eng d 20.00 USD 9798400211935 1018-5941 BD-DhAAL BD-DhAAL Kolasa, Marcin. Monetary Policy and Exchange Rate Dynamics in a Behavioral Open Economy Model / Marcin Kolasa, Sahil Ravgotra, Pawel Zabczyk. Washington, D.C. : International Monetary Fund, 2022. 1 online resource (44 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students We develop an extension of the open economy New Keynesian model in which agents are boundedly rational a la Gabaix (2020). Our setup nests rational expectations (RE) as a special case and it can successfully mitigate many "puzzling" aspects of the relationship between exchange rates and interest rates. Since the model implies an uncovered interest rate parity (UIP) condition featuring behavioral expectations, our results are also consistent with recent empirical evidence showing that several UIP puzzles vanish when actual exchange rate expectations are used (instead of realizations implicitly coupled with the RE assumption). We find that cognitive discounting dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the so-called FG puzzle is decreasing in openness. Finally, we show that accounting for myopia exacerbates the small open economy unit-root problem, makes positive monetary spillovers more likely, and increases the persistence of net foreign assets and the real exchange rate. Mode of access: Internet Central Banks and Their Policies imf Exchange Rates imf Monetary Policy imf Open Economy Macroeconomics imf Ravgotra, Sahil. Zabczyk, Pawel.. IMF Working Papers; Working Paper ; No. 2022/112 Full text available on IMF https://elibrary.imf.org/openurl?genre=journal&issn=1018-5941&volume=2022&issue=112 IMF e-Library