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Monetary Rules for Emerging Market Economies

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Author Info
Fabio Ghironi
Alessandro Rebucci

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Abstract

We compare the performance of a currency board, inflation targeting, and dollarization in a small, open developing economy with a liberalized capital account. We focus on the transmission of shocks to currency and country risk premia and on the role of fluctuations in premia in the propagation of other shocks. We calibrate our model on Argentina. The framework matches the second moments of key variables well. Welfare analysis suggests that dollarization is preferable to alternative regimes because it removes currency premium volatility. However, a currency board can match dollarization on welfare grounds if the central bank holds a sufficiently large stock of foreign reserves.

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Publisher Info
Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/34.

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Length: 41 pages
Date of creation: 05 Mar 2002
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Handle: RePEc:imf:imfwpa:02/34

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Related research
Keywords: Monetary policy Argentina Emerging markets Business cycles Exchange risk Social policy Economic models

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References listed on IDEAS
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. Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business Cycles in Emerging Economies: The Role of Interest Rates," NBER Working Papers 10387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Hughes Hallett, Andrew & Myrvin, Anthony, 2000. "Should Argentina Adopt The US Dollar?," CEPR Discussion Papers 2412, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May. [Downloadable!] (restricted)
    Other versions:
  4. Obstfeld, Maurice, 1998. " Open-Economy Macroeconomics: Developments in Theory and Policy," Scandinavian Journal of Economics, Blackwell Publishing, vol. 100(1), pages 247-75, March. [Downloadable!] (restricted)
    Other versions:
  5. 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.
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  6. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 97, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  8. Eric Parrado & Andres Velasco, 2002. "Optimal Interest Rate Policy in a Small Open Economy," NBER Working Papers 8721, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Thomas F. Cooley & Vincenzo Quadrini, 2001. "The costs of losing monetary independence: the case of Mexico," Proceedings, Federal Reserve Bank of Cleveland, pages 370-403.
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  10. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-32, March. [Downloadable!] (restricted)
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  12. Hau, Harald, 2000. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," CEPR Discussion Papers 2356, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Fabio Ghironi, 2000. "Macroeconomic Interdependence under Incomplete Markets," Boston College Working Papers in Economics 471, Boston College Department of Economics, revised 07 Feb 2003. [Downloadable!]
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  14. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Blackwell Publishing, vol. 49(4), pages 517-31, October. [Downloadable!] (restricted)
  15. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
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  16. Pablo Andres Neumeyer & Fabrizio Perri, 2000. "Busines Cycles in Emerging Economies: The Role of Country Risk," Econometric Society World Congress 2000 Contributed Papers 1158, Econometric Society. [Downloadable!]
  17. Stefan E. Oppers, . "Dual Currency Boards: A Proposal for Currency Stability," IMF Working Papers 00/199, International Monetary Fund.
  18. Jeffrey A. Frankel & Andrew K. Rose, 2000. "Estimating the Effect of Currency Unions on Trade and Output," NBER Working Papers 7857, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
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  21. Enrique G. Mendoza, 2001. "The benefits of dollarization when stabilization policy lacks credibility and financial markets are imperfect," Proceedings, Federal Reserve Bank of Cleveland, pages 440-481.
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  22. Moron, Eduardo & Winkelried, Diego, 2005. "Monetary policy rules for financially vulnerable economies," Journal of Development Economics, Elsevier, vol. 76(1), pages 23-51, February. [Downloadable!] (restricted)
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  23. Michael B. Devereux & Philip R. Lane, 2000. "Exchange Rates and Monetary Policy in Emerging Market Economies," Working Papers 072000, Hong Kong Institute for Monetary Research. [Downloadable!]
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  24. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier. [Downloadable!] (restricted)
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  25. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March. [Downloadable!] (restricted)
Full references

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. Fabio Ghironi, 2000. "Alternative Monetary Rules for a Small Open Economy: The Case of Canada," Boston College Working Papers in Economics 466, Boston College Department of Economics, revised 30 Oct 2000. [Downloadable!]
  2. Jan Strasky, 2005. "Optimal Forward-Looking Policy Rules in the Quarterly Projection Model of the Czech National Bank," Research and Policy Notes 2005/05, Czech National Bank, Research Department. [Downloadable!]
  3. Eric Parrado & Andres Velasco, 2002. "Optimal Interest Rate Policy in a Small Open Economy," NBER Working Papers 8721, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Eric Parrado, 2004. "Inflation Targeting and Exchange Rate Rules in an Open Economy," IMF Working Papers 04/21, International Monetary Fund. [Downloadable!]
  5. Eric Parrado & Andrés Velasco, 2001. "Alternative Monetary Rules in the Open-Economy: a Welfare-Based Approach," Working Papers Central Bank of Chile 129, Central Bank of Chile. [Downloadable!]
  6. Giancarlo Corsetti & Paolo Pesenti, 2001. "International Dimensions of Optimal Monetary Policy," NBER Working Papers 8230, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Sabina Pogorelec, 2006. "Fiscal and monetary policy in the enlarged European Union," Working Paper Series 655, European Central Bank. [Downloadable!]
  8. Rajesh Singh & Amartya Lahiri & Carlos Vegh, 2004. "Optimal Monetary Policy under Asset Market Segmentation," Econometric Society 2004 North American Summer Meetings 643, Econometric Society. [Downloadable!]
  9. Karlygash Kuralbayeva, 2007. "Inflation persistence: Implications for a design of monetary policy in a small open economy subject to external shocks," CEIS Research Paper 93, Tor Vergata University, CEIS. [Downloadable!]
  10. Luis-Felipe Zanna, 2003. "Interest rate rules and multiple equilibria in the small open economy," International Finance Discussion Papers 785, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Marco Airaudo & Luis-Felipe Zanna, 2004. "Endogenous Fluctuations in Open Economies: The Perils of Taylor Rules Revisited," Money Macro and Finance (MMF) Research Group Conference 2004 6, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  12. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  13. Argov, Eyal & Binyamini, Alon & Elkayam, David & Rozenshtrom, Irit, 2007. "A Small Macroeconomic Model to Support Inflation Targeting in Israel," MPRA Paper 4784, University Library of Munich, Germany. [Downloadable!]
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