The indirect channels) through which higher exchange rates can cause the central banks using a Taylor rule to lower interest rates are

Question

Quizplus · Accepted Answer

Decreased positive output gaps can lead to central banks lowering interest rates under a Taylor rule. A higher exchange rate can make domestic goods more expensive relative to foreign goods, potentially reducing exports and domestic demand, which in turn can decrease the positive output gap. The Taylor rule suggests adjusting interest rates in response to changes in inflation and the output gap, so a decrease in the positive output gap could lead to lower interest rates to stimulate the economy.

The Indirect Channels) Through Which Higher Exchange Rates Can Cause