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Monetary Rules for Emerging Market Economies

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  • Alessandro Rebucci
  • Fabio Ghironi

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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Bibliographic Info

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

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Length: 41
Date of creation: 01 Feb 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/34

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Keywords: Emerging markets; Welfare; inflation; equations; inflation targeting; equation; monetary policy; covariance; relative price; correlation; real interest rate; money supply; correlations; standard deviation; empirical model; standard deviations; calibration; price inflation; standard error; autocorrelation; heteroscedasticity; real money; probability; statistics; coefficient on inflation; econometrics; rational expectations; relative prices; real variables; standard errors; inflation rates; price level; optimization; real money supply; inflation target; inflation dynamics; mean productivity; inflation targeting regime; terms of trade; terms of trade shocks; predictions; nominal interest rate; foreign currency; financial statistics; monetary economics; stochastic models; real interest rates;

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