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Monetary Policy in Emerging Markets, Labor Market Search and Exchange Rate Pass-Through

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Author Info

  • Fabián De Achával

    ()
    (University of Evry, EPEE and TEPP (FR N3126, CNRS))

  • Xavier Fairise

    ()
    (University of Evry, EPEE and TEPP (FR N3126, CNRS))

Abstract

Standard small open economy models are often unsuitable to deal with the specific economic characteristics of emerging markets. In this paper we lay out a dynamic general-equilibrium model of an emerging small open economy in order to analyze the performance of alternative monetary policies. Our analysis incorporates to the model a non-walrasian labor market and an exchange rate pass-through to domestic prices. One of the central arguments of this paper is that the nature of the trade off between fixed and floating exchange rate regimes in emerging markets’ economies may be quite di¤erent to that of the industrial countries. In line with empirical evidence, our model predicts that countries exhibiting a high exchange rate pass-through will tend to smooth the exchange rate volatility.

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File URL: http://epee.univ-evry.fr/RePEc/2008/08-13.pdf
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Bibliographic Info

Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 08-13.

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Length: 38 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:eve:wpaper:08-13

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Related research

Keywords: Monetary Policy; Labor Market Search; Inflation; Exchange Rate Arrangements; Emerging Markets;

References

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  1. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  2. Walsh, Carl E., 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Department of Economics, Working Paper Series qt6tg550dv, Department of Economics, UC Santa Cruz.
  3. Choi, Woon Gyu & Cook, David, 2004. "Liability dollarization and the bank balance sheet channel," Journal of International Economics, Elsevier, vol. 64(2), pages 247-275, December.
  4. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  5. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
  6. Sveen, Tommy & Weinke, Lutz, 2008. "New Keynesian perspectives on labor market dynamics," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 921-930, July.
  7. Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "Stabilization Policy and the Costs of Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 482-509, May.
  8. Chang, Roberto & Velasco, Andres, 2006. "Currency mismatches and monetary policy: A tale of two equilibria," Journal of International Economics, Elsevier, vol. 69(1), pages 150-175, June.
  9. Michael Krause & David Lopez-Salido & Thomas Lubik, 2008. "Inflation Dynamics With Search Frctions: A Structural Econometric Analysis," CAMA Working Papers 2008-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  11. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  12. Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1600-1621, May.
  13. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  14. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
  15. Moyen, S. & Sahuc, J-G., 2004. "Incorporating Labour Market Frictions into an Optimising-Based Monetary Policy Model," Working papers 105, Banque de France.
  16. Thomas, Carlos, 2008. "Search and matching frictions and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 936-956, July.
  17. Cooley, Thomas F & Quadrini, Vincenzo, 2001. "The Cost of Losing Monetary Independence: The Case of Mexico," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 370-97, May.
  18. Cook, David, 2004. "Monetary policy in emerging markets: Can liability dollarization explain contractionary devaluations?," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1155-1181, September.
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