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Monetary Policies for Developing Countries: The Role of Institutional Quality

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Author Info
Huang, Haizhou
Wei, Shang-Jin

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Abstract

Weak public institutions, including high levels of corruption, characterize many developing countries. With a simple model, we demonstrate that institutional quality has important implications for the design of monetary policies and can produce several departures from the conventional wisdom. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the problem of a lack of credibility, is typically not appropriate in developing countries with poor institutions. Such an arrangement is inferior to an optimal inflation targeting, or a Rogoff-style central banker, whose optimal degree of conservatism is proportional to the quality of institutions. Furthermore, our results cast doubt on the notion that a low inflationary target or a currency board can be used as an instrument to induce governments to strengthen quality of public institutions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4911.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4911

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Related research
Keywords: conservative central banker; corruption; currency board; dollarization; inflation targeting; institutional quality; monetary policy;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Comparing Seasonal Forecasts of Industrial Production," Centre for Growth and Business Cycle Research Discussion Paper Series 103, Economics, The Univeristy of Manchester. [Downloadable!]
  2. Dai, Meixing & Sidiropoulos, Moïse, 2009. "Public investment, distortionary taxes and monetary policy transparency," MPRA Paper 15858, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Carsten Hefeker, 2009. "Taxation, Corruption and the Exchange Rate Regime," MAGKS Papers on Economics 200911, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
    Other versions:
  4. Yi Wu, 2008. "The Role of Institutional Quality in a Currency Crisis Model," IMF Working Papers 08/5, International Monetary Fund. [Downloadable!]
  5. Michele Berardi, 2008. "Fundamentalists vs. chartists: learning and predictor choice dynamics," Centre for Growth and Business Cycle Research Discussion Paper Series 104, Economics, The Univeristy of Manchester. [Downloadable!]
  6. Ourania Dimakou, 2006. "Monetary and Fiscal Policy Interactions: The Role of the Quality of Institutions in a Dynamic Environment," Birkbeck Working Papers in Economics and Finance 0607, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
  7. Reyes Calderón & José Álvarez-Arce & Silvia Mayoral, 2009. "Corporation as a Crucial Ally Against Corruption," Journal of Business Ethics, Springer, vol. 87(1), pages 319-332, April. [Downloadable!] (restricted)
  8. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Corruption, Seigniorage and Growth: Theory and Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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