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Monetary policy rules in transition economies: the impact of ambiguity

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  • Subrata Ghatak
  • Willy Spanjers
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    Abstract

    Purpose – The purpose of this paper is to discuss the potential benefits of monetary policy rules for transition economies (TEs). Design/methodology/approach – The paper discusses monetary policy rules, inflation targeting, political risk and ambiguity and monetary policy and ambiguity. Findings – It is argued that the nominal interest rate may fail to be the appropriate instrument in such rules. One reason is the amount of non-calculable political and economic risk inherent in TEs. These risks lead to a significant and volatile-ambiguity premium in the interest rate over and above the normal risk premium, which makes the real equilibrium interest rate difficult to measure. Furthermore, ambiguity of the public regarding the monetary policy leads to an ambiguity premium on inflation. Originality/value – The paper advocates a simple monetary policy rule based on a monetary aggregate like the money base minimizes the impact of ambiguity. It may therefore be the appropriate monetary policy for TEs.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal International Journal of Development Issues.

    Volume (Year): 6 (2007)
    Issue (Month): 1 (June)
    Pages: 26-37

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    Handle: RePEc:eme:ijdipp:v:6:y:2007:i:1:p:26-37

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    Related research

    Keywords: Inflation; Monetary policy; Political risk;

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    Cited by:
    1. Eichberger, Jürgen & Spanjers, Willy, 2007. "Liquidity and Ambiguity: Banks or Asset Markets?," Sonderforschungsbereich 504 Publications 07-18, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.

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