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Exchange Rates and Monetary Policy in Emerging Market Economies

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Author Info
Devereux, Michael B
Lane, Philip R.

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Abstract

This Paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade. In particular, we highlight the impact of financial frictions and the degree of exchange rate pass through in determining the relative performance of alternative regimes in stabilizing the economy in the face of external shocks. Our results are quite sharp. When exchange rate pass-through is high, a policy of non-traded goods inflation targeting does best in stabilizing the economy, and is better in welfare terms. When exchange rate pass-through is low, however, a policy of strict CPI inflation targeting is better. In all cases, a fixed exchange rate is undesirable. In addition, financial frictions have no implications for the ranking of alternative policy rules

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2874.

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Date of creation: Jul 2001
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Handle: RePEc:cpr:ceprdp:2874

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Related research
Keywords: emerging markets; financial frictions; monetary policy; pass-through;

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Find related papers by JEL classification:
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
F30 - International Economics - - International Finance - - - General

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