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Monetary policies for developing countries: The role of institutional quality

  • Huang, Haizhou
  • Wei, Shang-Jin

Weak public institutions, including high levels of corruption, characterize many developing countries. With a simple model, we demonstrate that institutional quality has important implications for the design of monetary policies and can produce several departures from the conventional wisdom. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the problem of a lack of credibility, is typically not appropriate in developing countries with poor institutions. Such an arrangement is inferior to an optimal inflation targeting, or a Rogoff-style central banker, whose optimal degree of conservatism is proportional to the quality of institutions. Furthermore, our results cast doubt on the notion that a low inflationary target or a currency board can be used as an instrument to induce governments to strengthen quality of public institutions.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 70 (2006)
Issue (Month): 1 (September)
Pages: 239-252

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Handle: RePEc:eee:inecon:v:70:y:2006:i:1:p:239-252
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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