Foreign demand for currencies and the Friedman rule
When foreign demand for a currency is taken into account, the Friedman rule, which states that central banks should seek a rate of deflation that is equal to the real interest rate, ceases to be Ramsey-optimal, according to a paper published by the Centre for Economic Policy Research in November.
The paper, entitled ‘Foreign demand for domestic currency and the optimal rate of inflation', shows that when foreign demand for a currency is substantial, as in the case of the dollar, central banks
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