The indirect channels) through which exchange rate movements can affect the interest rates set by central banks using a Taylor rule are

Question

Quizplus · Accepted Answer

Exchange rate movements can affect interest rates set by central banks through their impacts on output gaps and inflation differentials from targeted inflation. These are indirect channels that can influence the decisions made by central banks when setting interest rates according to the Taylor rule, which adjusts rates in response to changes in economic conditions such as inflation and the output gap.

The Indirect Channels) Through Which Exchange Rate Movements Can Affect