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Monetary Policies for Developing Countries

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  • Haizhou Huang
  • Shang-Jin Wei

Abstract

This paper examines the role of corruption in the design of monetary policies for developing countries in a framework of fiscal and monetary interaction and obtains several interesting results. First, pegged exchange rates, currency boards, or dollarization, while often prescribed as a solution to the problem of a lack of credibility for developing countries, is typically not credible in countries with serious corruption. Second, the optimal degree of conservatism for a Rogoff (1985)-type central banker is an inverse function of the corruption level. Third, either an optimally designed inflation target or an optimal-conservative central banker is preferable to an exchange rate peg, currency board, or dollarization.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/183.

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Length: 28
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/183

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Keywords: Inflation targeting; Dollarization; Central bank role; inflation; inflation rate; monetary policy; inflation target; central bank; inflation tax; low inflation; monetary policies; inflation targeting framework; money supply; aggregate demand; monetary economics; monetary regimes; monetary arrangement; monetary fund; inflation rates; monetary frameworks; monetary regime; foreign currency; optimal monetary policy; real output; monetary arrangements; money demand; inflation targeting regime; monetary framework; lower inflation; price level; monetary growth; monetary authority; rational expectations; independent central bank; monetary target; foreign exchange; intermediate monetary target; monetary economy; percent inflation;

References

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  1. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  2. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2000. "Currency boards: More than a quick fix?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 15(31), pages 269-335, October.
  3. Matthew B. Canzoneri, 1983. "Monetary policy games and the role of private information," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 249, Board of Governors of the Federal Reserve System (U.S.).
  4. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  5. Fisman, Raymond & Wei, Shang-Jin, 2001. "Tax Rates and Tax Evasion: Evidence from 'Missing Imports' in China," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3089, C.E.P.R. Discussion Papers.
  6. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(1), pages 3-20, January.
  7. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers, Queen's University, Department of Economics 560, Queen's University, Department of Economics.
  8. P. Benigno & M. Woodford, 2003. "Optimal monetary and fiscal policy: a linear-quadratic approach," Proceedings, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.).
  9. Julan Du & Shang-Jin Wei, 2002. "Does Insider Trading Raise Market Volatility?," Working Papers, Hong Kong Institute for Monetary Research 072002, Hong Kong Institute for Monetary Research.
  10. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2000. "Central Bank Independence: An Update of Theory and Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2353, C.E.P.R. Discussion Papers.
  11. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  12. Wei, Shang-Jin, 2001. "Domestic Crony Capitalism and International Fickle Capital: Is There a Connection?," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 4(1), pages 15-45, Spring.
  13. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 303-354.
  14. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 25(4), pages 619-30, October.
  15. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  16. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(2), pages 295-313, April.
  17. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
  18. Chong-En Bai & Shang-Jin Wei, 2000. "Quality of Bureaucracy and Open-Economy Macro Policies," NBER Working Papers 7766, National Bureau of Economic Research, Inc.
  19. Maskin, Eric & Moore, John, 1999. "Implementation and Renegotiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(1), pages 39-56, January.
  20. Huang,H. & Padilla,A.J., 1995. "Fiscal Policy and the Sub-Optimality of the Walsh Contract for Central Bankers," Papers, Centro de Estudios Monetarios Y Financieros- 9522, Centro de Estudios Monetarios Y Financieros-.
  21. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 35(3), pages 1320-1346, September.
  22. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 150-67, March.
  23. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  24. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
  25. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2003. "Exchange Rate Regimes: Choices and Consequences," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262072408, December.
  26. Eichengreen, B. & Masson, P. & Savastano, M. & Sharma, S., 1999. "Transition Strategies and Nominal Anchors on the Road to Greater Exchange-Rate Flexibility," Princeton Essays in International Economics, International Economics Section, Departement of Economics Princeton University, 213, International Economics Section, Departement of Economics Princeton University,.
  27. Rose-Ackerman, Susan, 1975. "The economics of corruption," Journal of Public Economics, Elsevier, Elsevier, vol. 4(2), pages 187-203, February.
  28. Moore, John & Repullo, Rafael, 1990. "Nash Implementation: A Full Characterization," Econometrica, Econometric Society, Econometric Society, vol. 58(5), pages 1083-99, September.
  29. Haizhou Huang & A. Jorge Padilla, 2002. "Fiscal Policy and the Implementation of the Walsh Contract for Central Bankers," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 27-42, May.
  30. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, Econometric Society, vol. 56(5), pages 1191-1220, September.
  31. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1411-28, November.
  32. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 681-712, August.
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Citations

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Cited by:
  1. Tobias Knedlik, 2006. "Implementing an International Lender of Last Resort," IWH Discussion Papers, Halle Institute for Economic Research 20, Halle Institute for Economic Research.
  2. Grand Nathalie & Dropsy Vincent, 2005. "Exchange Rate And Inflation Targeting In Morocco And Tunisia," Macroeconomics, EconWPA 0507018, EconWPA.
  3. Hasim Ak├ža & Ahmet Yilmaz Ata & Coskun Karaca, 2012. "Inflation and Corruption Relationship: Evidence from Panel Data in Developed and Developing Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 2(3), pages 281-295.

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