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A General Equilibrium Open Economy Model for Emerging Markets - Monetary Policy with a Dualistic Labor Market

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

Abstract

An optimizing model of a small open emerging market economy (SOEME) with dualistic labour markets and two types of consumers, delivers a tractable model for monetary policy. Differences between the SOEME and the SOE are derived. Parameters depend on features of the labour market and on consumption inequality, and affect the natural interest rate, terms of trade and potential output. The supply curve turns out to be flatter and more volatile, with a larger number of shift factors. A simple basic version of the model is simulated in order to compare different policy targets in response to a cost shock. Flexible domestic inflation targeting delivers stability and the lowest volatility. Some weight on output and on interest smoothing allows monetary policy to be less contractionary. Exchange rate flexibility is less but still makes a major contribution to controlling inflation.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22377.

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Date of creation: Jan 2007
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Handle: RePEc:eab:macroe:22377

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Keywords: small open emerging market; optimal monetary policy; dualistic labour markets; Terms of Trade; Potential output;

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References

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  1. Goyal, Ashima, 2008. "Incentives from Exchange Rate Regimes in an Institutional Context," MPRA Paper, University Library of Munich, Germany 24310, University Library of Munich, Germany.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers, National Bureau of Economic Research, Inc 7147, National Bureau of Economic Research, Inc.
  3. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers, Stockholm - International Economic Studies 638, Stockholm - International Economic Studies.
  4. Reinhart, Carmen & Ogaki, Masao & Ostry, Jonathan, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," MPRA Paper, University Library of Munich, Germany 6978, University Library of Munich, Germany.
  5. Arminio Fraga & Ilan Goldfajn & André Minella, 2004. "Inflation Targeting in Emerging Market Economies," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2003, Volume 18, pages 365-416 National Bureau of Economic Research, Inc.
  6. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach," NBER Working Papers, National Bureau of Economic Research, Inc 8604, National Bureau of Economic Research, Inc.
  7. Ashima Goyal, 2011. "Sustainable debt and deficits in Emerging Markets," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 4(2), pages 113-136.
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Citations

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Cited by:
  1. Ashima Goyal, 2008. "The Natural Interest Rate in Emerging Markets," Working Papers, eSocialSciences id:1675, eSocialSciences.
  2. Ashima Goyal, 2011. "History of monetary policy in India since independence," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2011-018, Indira Gandhi Institute of Development Research, Mumbai, India.
  3. Ashima Goyal & Sanchit Arora, 2013. "Estimating the Indian natural interest rate and evaluating policy," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2013-017, Indira Gandhi Institute of Development Research, Mumbai, India.
  4. Mishra, Ankita & Mishra, Vinod, 2012. "Evaluating inflation targeting as a monetary policy objective for India," Economic Modelling, Elsevier, Elsevier, vol. 29(4), pages 1053-1063.
  5. Ashima Goyal & Sanchit Arora, 2012. "Deriving India's Potential growth from theory and structure," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2012-018, Indira Gandhi Institute of Development Research, Mumbai, India.
  6. Ashima Goyal & Shruti Tripathi, 2012. "Stability and policy rules in emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2012-004, Indira Gandhi Institute of Development Research, Mumbai, India.
  7. Goyal, Ashima, 2012. "Propagation Mechanisms in Inflation: Governance as key," MPRA Paper, University Library of Munich, Germany 46360, University Library of Munich, Germany.

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