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Stability and policy rules in emerging markets

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  • Ashima Goyal

    ()
    (Indira Gandhi Institute of Development Research)

  • Shruti Tripathi

    ()
    (Indira Gandhi Institute of Development Research)

Abstract

Stability results for an open economy DSGE adapted to an emerging market (SOEME) with a dualistic structure have the same structure as in the original model, but those derived for the simulated version turn out to impose no restriction on the coefficient of inflation, but rather a threshold on the coefficient of the output gap. Other rigidities, lags and some degree of backward looking behavior in the simulated SOEME model arising from its calibration to an emerging market, may be helping provide a nominal anchor. Estimation of a Taylor rule for India, simulations in the SOEME model itself and a variant with government debt, confirm the analytical result. Implications are, first, optimization can be as effective as following a monetary policy rule. Second, knowledge of the specific rigidities in an economy can give useful inputs for the design of policy-their effect on stability should be more carefully researched.

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Bibliographic Info

Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2012-004.

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Length: 33 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:ind:igiwpp:2012-004

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Keywords: DSGE; emerging economy; rigidities; stability; optimization; Taylor rule;

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References

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  1. Ashima Goyal, 2007. "A General equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market," Working Papers 2007-016, Madras School of Economics,Chennai,India.
  2. Ashima Goyal, 2008. "The Natural Interest Rate in Emerging Markets," Working Papers id:1675, eSocialSciences.
  3. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  4. Ashima Goyal, 2007. "Tradeoffs, Delegation and Fiscal-Monetary Coordination in a Developing Economy," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 42(2), pages 141-164, December.
  5. Ashima Goyal, 2011. "Sustainable debt and deficits in Emerging Markets," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, vol. 4(2), pages 113-136.
  6. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  7. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
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Cited by:
  1. Ashima Goyal & Sanchit Arora, 2012. "Deriving India's Potential growth from theory and structure," Working Papers 2012-018, Madras School of Economics,Chennai,India.

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