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Monetary policy rules in transition economies: the impact of ambiguity

Author

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  • Subrata Ghatak
  • Willy Spanjers

Abstract

Purpose - The purpose of this paper is to discuss the potential benefits of monetary policy rules for transition economies (TEs). Design/methodology/approach - The paper discusses monetary policy rules, inflation targeting, political risk and ambiguity and monetary policy and ambiguity. Findings - It is argued that the nominal interest rate may fail to be the appropriate instrument in such rules. One reason is the amount of non-calculable political and economic risk inherent in TEs. These risks lead to a significant and volatile-ambiguity premium in the interest rate over and above the normal risk premium, which makes the real equilibrium interest rate difficult to measure. Furthermore, ambiguity of the public regarding the monetary policy leads to an ambiguity premium on inflation. Originality/value - The paper advocates a simple monetary policy rule based on a monetary aggregate like the money base minimizes the impact of ambiguity. It may therefore be the appropriate monetary policy for TEs.

Suggested Citation

  • Subrata Ghatak & Willy Spanjers, 2007. "Monetary policy rules in transition economies: the impact of ambiguity," International Journal of Development Issues, Emerald Group Publishing, vol. 6(1), pages 26-37, February.
  • Handle: RePEc:eme:ijdipp:v:6:y:2007:i:1:p:26-37
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    Citations

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    Cited by:

    1. Eichberger, Jürgen & Spanjers, Willy, 2007. "Liquidity and ambiguity : banks or asset markets?," Papers 07-18, Sonderforschungsbreich 504.
    2. Ghatak, Subrata & Moore, Tomoe, 2008. "Monetary policy rules for transition economies: an empirical analysis," Economics Discussion Papers 2008-5, School of Economics, Kingston University London.
    3. Eichberger, Jürgen & Spanjers, Willem, 2003. "Liquidity and Ambiguity: Banks or Asset Markets?," Economics Discussion Papers 2003-11, School of Economics, Kingston University London.
    4. Spanjers, Willy, 2008. "The Asian crisis and macroeconomic development: the impact of ambiguity," Economics Discussion Papers 2008-3, School of Economics, Kingston University London.

    More about this item

    Keywords

    Monetary policy; Inflation; Political risk;

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