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Monetary Policy Rules For Small And Open Developing Economies: A Counterfactual Policy Analysis

Author

Listed:
  • Tony Cavoli

    (School of Economics and Finance, Queensland University of Technology)

  • Ramkishen S. Rajan

    (School of Public Policy, George Mason University)

Abstract

This paper uses a model calibrated to suit a small open Asian economy to present a series of counterfactual policy experiments aimed at comparing conventional optimal inflation targeting (IT) under commitment and discretion and variations of simple fixed monetary policy rules (MPRs). Two significant points of departure between the model presented here and previous ones for industrial countries are the incorporation of the real exchange rate and consideration of possible contractionary depreciation/devaluation. This represents a realistic scenario for some Asian economies after the crisis. In assessing the impact of different policy types it is essential to find parameters for model calibration that suitably represent the small and open Asian economies that have recently implemented inflation targeting arrangements. We have used estimates from Thailand over a recent period (1993-2003) to assist in selecting these parameters.

Suggested Citation

  • Tony Cavoli & Ramkishen S. Rajan, 2006. "Monetary Policy Rules For Small And Open Developing Economies: A Counterfactual Policy Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 31(1), pages 89-111, June.
    • Handle: RePEc:jed:journl:v:31:y:2006:i:1:p:89-111
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    File URL: http://www.jed.or.kr/full-text/31-1/31-1-6.pdf
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    Citations

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    Cited by:

    1. Kiran Ijaz & Muhammad Zakaria & Bashir A. Fida, 2014. "Terms-of-Trade Volatility and Inflation in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(1), pages 111-132, Jan-June.
    2. Sánchez, Marcelo, 2005. "The link between interest rates and exchange rates: do contractionary depreciations make a difference?," Working Paper Series 548, European Central Bank.
    3. Seedwell Hove & Albert Touna Mama & Fulbert Tchana Tchana, 2016. "Terms of Trade Shocks and Inflation Targeting in Emerging Market Economies," South African Journal of Economics, Economic Society of South Africa, vol. 84(1), pages 81-108, March.
    4. Jesus M. Garcia-Iglesias & Rebeca Muñoz Torres & George Saridakis, 2013. "Did the Bank of Mexico follow a systematic behaviour in its transition to an inflation targeting regime?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(14), pages 1205-1213, July.
    5. Marc Pourroy, 2013. "Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies," Post-Print halshs-00881359, HAL.
    6. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
    7. Tony Cavoli & Ramkishen S. Rajan, 2005. "Have Exchange Rate Regimes in Asia become More Flexible Post crisis? Re-VISITING the EVIDENCE," Finance Working Papers 22563, East Asian Bureau of Economic Research.
    8. Carlos Garcia & Jorge Restrepo & Mr. Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," IMF Working Papers 2009/234, International Monetary Fund.
    9. Sánchez, Marcelo, 2006. "How does information affect the comovement between interest rates and exchange rates?," Working Paper Series 608, European Central Bank.
    10. Mr. Marco Airaudo & Mr. Edward F Buffie & Luis-Felipe Zanna, 2016. "Inflation Targeting and Exchange Rate Management In Less Developed Countries," IMF Working Papers 2016/055, International Monetary Fund.
    11. Cavoli, Tony, 2008. "The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics," Economic Modelling, Elsevier, vol. 25(5), pages 1011-1021, September.
    12. Garcia, Carlos J. & Restrepo, Jorge E. & Roger, Scott, 2011. "How much should inflation targeters care about the exchange rate?," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1590-1617.
    13. Ruijie Cheng & Ramkishen S. Rajan, 2020. "Monetary trilemma, dilemma, or something in between?," International Finance, Wiley Blackwell, vol. 23(2), pages 257-276, August.
    14. Emmanuel Dubois & Jerome Hericourt & Valerie Mignon, 2009. "What if the euro had never been launched? A counterfactual analysis of the macroeconomic impact of euro membership," Economics Bulletin, AccessEcon, vol. 29(3), pages 2241-2255.
    15. Hoda Selim, 2012. "Exploring the Role of the Exchange Rate in Monetary Policy in Egypt," Working Papers 733, Economic Research Forum, revised 2012.
    16. Carlos Garcia & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes1," ILADES-UAH Working Papers inv226, Universidad Alberto Hurtado/School of Economics and Business.
    17. Buffie, Edward F. & Airaudo, M. & Zanna, Felipe, 2018. "Inflation targeting and exchange rate management in less developed countries," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 159-184.

    More about this item

    Keywords

    Asia; Developing Economy; Exchange Rate; Inflation Targeting (IT); Monetary Policy Rules (MPRs);
    All these keywords.

    JEL classification:

    • 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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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