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Distributional Effects of Monetary Policy in Emerging Market Economies

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  • Prasad, Eswar

    (Cornell University)

  • Zhang, Boyang

    (Cornell University)

Abstract

We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.

Suggested Citation

  • Prasad, Eswar & Zhang, Boyang, 2015. "Distributional Effects of Monetary Policy in Emerging Market Economies," IZA Discussion Papers 9272, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp9272
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    Cited by:

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    2. Robert Jarrow & Sujan Lamichhane, 2020. "The Effects of Yield Control Monetary Policy: A Helicopter Money Drop to Financial Institutions," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 1-38, March.
    3. Ning Zhang, 2017. "Two-way capital flows: A risk-sharing approach," Working Papers 2019-09, Business School - Economics, University of Glasgow.
    4. Mohimont, Jolan, 2022. "Welfare effects of business cycles and monetary policies in a small open emerging economy," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    5. Ning Zhang, 2017. "Two-way capital flows: A risk-sharing approach," Working Papers 2019_09, Business School - Economics, University of Glasgow.
    6. Gabriela Cugat, 2019. "Emerging markets, household heterogeneity, and exchange rate policy," 2019 Meeting Papers 526, Society for Economic Dynamics.
    7. Tara Iyer, 2016. "Optimal Monetary Policy in an Open Emerging Market Economy," Working Paper Series WP-2016-6, Federal Reserve Bank of Chicago.
    8. Zhandos Ybrayev, 2022. "Distributional Consequences of Monetary Policy in Emerging Economies: Dollarization, Domestic Inflation, and Income Divergence," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(2), pages 186-210, June.
    9. Jolan Mohimont & Maite de Sola Perea & Marie-Denise Zachary, 2022. "Softening the blow: Job retention schemes in the pandemic," Working Paper Research 414, National Bank of Belgium.

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    More about this item

    Keywords

    monetary policy rules; exchange rate management; interest rate smoothing; distributional effects; emerging markets; financial frictions; inflation targeting;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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