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Incentives from Exchange Rate Regimes in an Institutional Context

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  • Goyal, Ashima

Abstract

An open economy macromodel, calibrated to typical institutions and shocks of a populous emerging market economy, shows that a monetary stimulus preceding a supply shock can abort inflation at minimum output cost, since of the appreciation of exchange rates, accompanying a fall in interest rates and rise in output. Analytic results obtained for two periods are generalized through simulations and validated through estimation. One instrument achieves both domestic output and exchange rate objectives, partly since it creates correct incentives for foreign exchange traders. Strategic interactions imply supporting institutions are required to coordinate monetary, fiscal policy, and markets to the optimal equilibrium.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24310.

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Date of creation: Jan 2008
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Publication status: Published in Journal of Quantitative Economics 1 and 2.6(2008): pp. 101-121
Handle: RePEc:pra:mprapa:24310

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Keywords: Emerging Market Economy; Mundell-Fleming; Monetary Policy; FX Market; Supply Shocks;

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References

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  1. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination In Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
  2. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1989, C.E.P.R. Discussion Papers.
  3. Goyal, Ashima, 2002. "Coordinating monetary and fiscal policies: a role for rules?," MPRA Paper 29200, University Library of Munich, Germany.
  4. Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1999. "Dualism and Macroeconomic Volatility," Scholarly Articles 4554124, Harvard University Department of Economics.
  5. Olivier Jeanne & Andrew K. Rose, 1999. "Noise Trading and Exchange Rate Regimes," NBER Working Papers 7104, National Bureau of Economic Research, Inc.
  6. Bhattacharya, Utpal & Weller, Paul, 1997. "The advantage to hiding one's hand: Speculation and central bank intervention in the foreign exchange market," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(2), pages 251-277, July.
  7. Goyal, Ashima & Pujari, Ayan Kumar, 2005. "Identifying long run supply curve of India," MPRA Paper 24021, University Library of Munich, Germany.
  8. Richard K. Lyons, 2006. "The Microstructure Approach to Exchange Rates," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026262205x, December.
  9. Robert H. Bates & Avner Greif & Margaret Levi & Jean-Laurent Rosenthal, 1998. "Analytic Narratives," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 6355.
  10. Ghosh, Atish R., 2002. "Central bank secrecy in the foreign exchange market," European Economic Review, Elsevier, Elsevier, vol. 46(2), pages 253-272, February.
  11. Ashima Goyal & A. K. Jha, 2005. "Dictatorship, Democracy and Institutions: Macropolicy in China and India," Working Papers id:264, eSocialSciences.
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Citations

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Cited by:
  1. Ashima Goyal, 2008. "The Structure of inflation, information and labour markets: Implications for monetary policy," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2008-010, Indira Gandhi Institute of Development Research, Mumbai, India.
  2. Goyal, Ashima, 2011. "A general equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market," Economic Modelling, Elsevier, Elsevier, vol. 28(3), pages 1392-1404, May.
  3. Ashima Goyal, 2008. "The Natural interest rate in emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2008-014, Indira Gandhi Institute of Development Research, Mumbai, India.
  4. Goyal, Ashima, 2012. "Propagation Mechanisms in Inflation: Governance as key," MPRA Paper 46360, University Library of Munich, Germany.
  5. Ashima Goyal, 2010. "The Future of Financial Liberalization in South Asia," Finance Working Papers 21973, East Asian Bureau of Economic Research.
  6. Mishra, Ankita & Mishra, Vinod, 2012. "Evaluating inflation targeting as a monetary policy objective for India," Economic Modelling, Elsevier, Elsevier, vol. 29(4), pages 1053-1063.
  7. Ashima Goyal, . "Inflationary Pressures in South Asia," MPDD Working Paper Series WP/11/14, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
  8. Ashima Goyal, 2011. "History of monetary policy in India since independence," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2011-018, Indira Gandhi Institute of Development Research, Mumbai, India.
  9. Goyal, Ashima, 2006. "Macroeconomic policy and the exchange rate: working together?," MPRA Paper 27768, University Library of Munich, Germany.

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