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Monetary Policy Rules for Financially Vulnerable Economies

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  • Eduardo Morón
  • Diego Winkelried

Abstract

One distinguishable characteristic of emerging market economies is that they are not financially robust. These economies are incapable of smoothing out large external shocks, as sudden capital outflows imply large and abrupt swings in the real exchange rate. Using a small open-economy model, this paper examines alternative monetary policy rules for economies with different degrees of liability dollarization. The paper answers the question of how efficient it is to use inflation targeting under high liability dollarization. Our findings suggest that it might be optimal to follow a nonlinear policy rule that defends the real exchange rate in a financially vulnerable economy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/39.

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Length: 36
Date of creation: 01 Feb 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/39

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Keywords: Inflation targeting; Latin America; exchange rate; inflation; monetary policy; real exchange rate; central bank; exchange rate regime; monetary policy rules; aggregate demand; flexible exchange rate; exchange rate regimes; exchange rates; monetary fund; exchange rate fluctuations; flexible exchange rate regime; fixed exchange rate; exchange rate depreciation; exchange rate policy; flexible exchange rates; nominal exchange rate; real exchange rate depreciation; real exchange rate fluctuations; fixed exchange rate regime; exchange rate pass; flexible exchange rate regimes; exchange rate risk; monetary authority; monetary policy rule; exchange rate shock; money market; exchange rate band; independent monetary policy; discount rate; optimal monetary policy; inflation-targeting; exchange rate volatility; real exchange rate volatility; monetary policies; currency substitution; monetary policy decisions; exchange rate targeting; money demand; floating exchange rate; monetary policy objectives; exchange rate movements; real exchange rate movements; interest rate targeting; exchange rate increases; optimal exchange rate regime; foreign exchange; monetary assets; aggregate demand curve; intermediate exchange rate regime; foreign exchange market; intermediate exchange rate; currency areas; exchange rate flexibility; monetary economics; fixed exchange rate regimes; monetary conditions; monetary condition;

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References

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