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Monetary Policy Rules for Financially Vulnerable EconomieEd

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Author Info
Eduardo Moron (Universidad del Pacifico)
Diego Winkelried (Banco Central de Reserva del Peru)

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Abstract

One distinguishable characteristic of emerging economies is that they are not financially robust. These economies are incapable to smooth 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 is to use inflation targeting under high liability dollarization. Our findings suggest that it might be optimal to follow a non-linear policy rule that defends the real exchange rate in a financially vulnerable economy.

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Paper provided by EconWPA in its series Macroeconomics with number 0205001.

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Length: 30 pages
Date of creation: 01 May 2002
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Handle: RePEc:wpa:wuwpma:0205001

Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/; to print on HP; pages: 30
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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Masson, Paul R., 2001. "Exchange rate regime transitions," Journal of Development Economics, Elsevier, vol. 64(2), pages 571-586, April. [Downloadable!] (restricted)
    Other versions:
  2. Walsh, Carl E, 2003. " Accountability, Transparency, and Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 829-49, October.
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  1. Rossini, Renzo & Vega, Marco, 2007. "El mecanismo de transmisión de la política monetaria en un entorno de dolarización financiera: El caso del Perú entre 1996 y 2006," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 14, pages 11-32. [Downloadable!]
  2. Paul Castillo & Diego Winkelried, 2007. "Dollarization Persistence and Individual Heterogeneity," Working Papers 2007-004, Banco Central de Reserva del Perú. [Downloadable!]
    Other versions:
  3. Carmen Broto, 2008. "Inflation targeting in Latin America: Empirical analysis using GARCH models," Banco de España Working Papers 0826, Banco de España. [Downloadable!]
  4. Eduardo Moron & Juan F. Castro & Diego Winkelried, 2004. "Assessing Financial Vulnerability in Partially Dollarized Economies," International Finance 0406002, EconWPA. [Downloadable!]
  5. Diego Winkelried & Juan Francisco Castro & Eduardo Morón, 2004. "Understanding Financial Vulnerability in Partially Dollarized Economies," Econometric Society 2004 Latin American Meetings 260, Econometric Society. [Downloadable!]
  6. Saki Bigio & Jorge Salas, 2006. "Non-Linear Effects of Monetary Policy and Real Exchange Rate Shocks in Partially Dollarized Economies: An Empirical Study for Peru," Working Papers 2006-008, Banco Central de Reserva del Perú. [Downloadable!]
  7. Mette Ersbak Bang Nielsen, 2006. "Exchange Rate Targeting in a Small Open Economy," BORRADORES DE ECONOMIA 002685, BANCO DE LA REPÚBLICA. [Downloadable!]
  8. Saki Bigio & Marco Vega, 2006. "Monetary Policy under Balance Sheet Uncertainty," Computing in Economics and Finance 2006 157, Society for Computational Economics. [Downloadable!]
  9. Marcelo Sánchez, 2005. "The link between interest rates and exchange rates - do contractionary depreciations make a difference?," Working Paper Series 548, European Central Bank. [Downloadable!]
  10. Marcelo Sánchez, 2006. "How does information affect the comovement between interest rates and exchange rates?," Working Paper Series 608, European Central Bank. [Downloadable!]
  11. Marcela Meirelles Aurelio, 2006. "Targeting inflation and the fiscal balance : what is the optimal policy mix?," Research Working Paper RWP 06-07, Federal Reserve Bank of Kansas City. [Downloadable!]
  12. Mette Ersbak Bang Nielsen, . "Exchange Rate Targeting in a Small Open Economy," Borradores de Economia 367, Banco de la Republica de Colombia. [Downloadable!]
  13. Fabio Ghironi & Alessandro Rebucci, 2000. "Monetary Rules for Emerging Market Economies," Boston College Working Papers in Economics 476, Boston College Department of Economics, revised 13 Aug 2001. [Downloadable!]
    Other versions:
  14. Renzo Rossini & Marco Vega, 2007. "The monetary policy transmission mechanism under financial dollarization: the case of Peru 1996-2006," Working Papers 2007-017, Banco Central de Reserva del Perú. [Downloadable!]
    Other versions:
  15. Eduardo Moron & Juan F. Castro, 2003. "Dedollarizing the Peruvian Economy," Macroeconomics 0312005, EconWPA. [Downloadable!]
  16. Erdem Basci & Özgür Özel & Cagri Sarikaya, 2008. "The monetary transmission mechanism in Turkey: new developments," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 475-499 Bank for International Settlements. [Downloadable!]
    Other versions:
  17. Andrew Berg & Eduardo Borensztein, & Paolo Mauro, 2002. "An Evaluation of Monetary Regime Options for Latin America," Working Papers 67, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
    Other versions:
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