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We are grateful to John Nelmes for guidance and many helpful discussions.
The exchange rate trading band vis-à-vis the U.S. dollar was widened to +/− 3 percent from +/− 1 percent in August 2015.
The forward-looking expectations assumption is relaxed here as some forms of backward-looking expectations are allowed in determining the exchange rate.
Since our model assumes serially correlated errors in exchange rate expectations (δz < 1), there is a role for monetary policy to respond directly to exchange rate changes.
The only positive weights on the weighting matrix are the ones related to output gap, inflation and exchange rate.
Results are presented in deviations, i.e., movements in the variables in relation to their long-run values.
Note that with our definition of the exchange rate, a decline is an appreciation of the dong.
The sum of exports and imports is about 160 percent of GDP.
In the data, a one standard deviation move in U.S. rates is 0.21 percentage points.