IDEAS home Printed from https://ideas.repec.org/a/wly/jmoncb/v40y2008i2-3p243-271.html

Monetary Policy Choices in Emerging Market Economies: The Case of High Productivity Growth

Author

Listed:
  • FEDERICO RAVENNA
  • FABIO M. NATALUCCI

Abstract

We develop a general equilibrium model of an emerging market economy where productivity growth differentials between tradable and non‐tradable sectors result in an equilibrium appreciation of the real exchange rate—the so‐called Balassa‐Samuelson effect. The paper explores the dynamic properties of this economy and the welfare implications of alternative policy rules. We show that the real exchange rate appreciation limits the range of policy rules that, with a given probability, keep inflation and exchange rate within predetermined numerical targets. We also find that the B–S effect raises by an order of magnitude the welfare loss associated with policy rules that prescribe active exchange rate management.

Suggested Citation

  • Federico Ravenna & Fabio M. Natalucci, 2008. "Monetary Policy Choices in Emerging Market Economies: The Case of High Productivity Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2‐3), pages 243-271, March.
    • Handle: RePEc:wly:jmoncb:v:40:y:2008:i:2-3:p:243-271
    DOI: 10.1111/j.1538-4616.2008.00112.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1538-4616.2008.00112.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1538-4616.2008.00112.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael B. Devereux, 2003. "A Macroeconomic Analysis of EU Accession under Alternative Monetary Policies," Journal of Common Market Studies, Wiley Blackwell, vol. 41(5), pages 941-964, December.
    2. Willem H. Buiter & Clemens Grafe, 2002. "Anchor, float or abandon ship: exchange rate regimes for the accession countries," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 55(221), pages 111-142.
    3. Rogers, John H., 2007. "Monetary union, price level convergence, and inflation: How close is Europe to the USA?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 785-796, April.
    4. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72(6), pages 584-584.
    5. Cook, David & Devereux, Michael B., 2006. "Accounting for the East Asian Crisis: A Quantitative Model of Capital Outflows in Small Open Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 721-749, April.
    6. Christoph Fischer, 2004. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(2), pages 179-210, June.
    7. Coricelli, Fabrizio & Jazbec, Boštjan & Masten, Igor, 2003. "Exchange Rate Pass-Through in Candidate Countries," CEPR Discussion Papers 3894, Centre for Economic Policy Research.
    8. Takatoshi Ito & Anne O. Krueger, 1999. "Introduction to "Changes in Exchange Rates in Rapidly Development Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7)"," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues, pages 1-8, National Bureau of Economic Research, Inc.
    9. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    10. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Stabilization policy and the costs of dollarization," Proceedings, Federal Reserve Bank of Cleveland, pages 482-517.
    11. Rodriguez-Palenzuela, Diego & Thimann, Christian & Backé, Peter, 2002. "Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective," Working Paper Series 132, European Central Bank.
    12. Uribe, Martín & Schmitt-Grohe, Stephanie, 2004. "Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the US Business Cycle," CEPR Discussion Papers 4654, Centre for Economic Policy Research.
    13. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 743-764.
    14. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
    15. Christopher A. Sims & Jinill Kim & Sunghyun Kim, 2003. "Calculating and Using Second Order Accurate Solution of Discrete Time Dynamic Equilibrium Models," Computing in Economics and Finance 2003 162, Society for Computational Economics.
    16. Zsolt Darvas & György Szapáry, 2004. "Business Cycle Synchronisation in the Enlarged EU: Comovements in the New and Old Members," MNB Working Papers 2004/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    17. Ito, Takatoshi & Krueger, Anne O. (ed.), 1999. "Changes in Exchange Rates in Rapidly Developing Countries," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226386737, March.
    18. Dubravko Mihaljek & Marc Klau, 2004. "The Balassa–Samuelson Effect in Central Europe: A Disaggregated Analysis1," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 46(1), pages 63-94, March.
    19. Monacelli, Tommaso, 2004. "Into the Mussa puzzle: monetary policy regimes and the real exchange rate in a small open economy," Journal of International Economics, Elsevier, vol. 62(1), pages 191-217, January.
    20. Takatoshi Ito & Anne O. Krueger, 1999. "Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues," NBER Books, National Bureau of Economic Research, Inc, number ito_99-1.
    21. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, April.
    22. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July.
    23. Mr. Tomás Holub & Mr. Martin Cihak, 2001. "Convergence of Relative Prices and Inflation in Central and Eastern Europe," IMF Working Papers 2001/124, International Monetary Fund.
    24. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
    25. Attila Csajbók (ed.) & Ágnes Csermely (ed.), 2002. "Adopting the euro in Hungary: expected costs, benefits and timing," MNB Occasional Papers 2002/24, Magyar Nemzeti Bank (Central Bank of Hungary).
    26. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    27. De Broeck, Mark & Slok, Torsten, 2006. "Interpreting real exchange rate movements in transition countries," Journal of International Economics, Elsevier, vol. 68(2), pages 368-383, March.
    28. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
    29. Matthew Canzoneri & Robert Cumby & Behzad Diba & Gwen Eudey, 2002. "Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation," Review of International Economics, Wiley Blackwell, vol. 10(3), pages 497-516, August.
    30. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April.
    31. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
    32. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Federico Ravenna & Giovanni Lombardo, 2009. "Trade and Optimal Monetary Policy," 2009 Meeting Papers 784, Society for Economic Dynamics.
    2. Fabio M. Natalucci & Federico Ravenna, 2002. "The road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," International Finance Discussion Papers 741, Board of Governors of the Federal Reserve System (U.S.).
    3. Lipinska, Anna, 2006. "The Maastricht convergence criteria and optimal monetary policy for the EMU accession countries," MPRA Paper 1795, University Library of Munich, Germany.
    4. Lipinska, Anna, 2008. "The Maastricht Criteria and Optimal Monetary and Fiscal Policy Mix for the EMU Accession Countries," MPRA Paper 16376, University Library of Munich, Germany.
    5. Anna Lipinska, 2006. "Monetary regime choice in the accession countries - a theoretical analysis," Computing in Economics and Finance 2006 243, Society for Computational Economics.
    6. Lipinska, Anna, 2008. "The Maastricht Convergence Criteria and Monetary Regimes for the EMU Accession Countries," MPRA Paper 16375, University Library of Munich, Germany.
    7. Lombardo, Giovanni & Ravenna, Federico, 2014. "Openness and optimal monetary policy," Journal of International Economics, Elsevier, vol. 93(1), pages 153-172.
    8. Ravenna, Federico, 2005. "The European Monetary Union as a commitment device for new EU member states," Working Paper Series 516, European Central Bank.
    9. Masten, Igor, 2008. "Optimal monetary policy with Balassa-Samuelson-type productivity shocks," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 120-141, March.
    10. 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.
    11. M Farid, 2010. "Does Export Pricing Explain ‘Fear of Floating’ in Small Open Emerging Market Economies?," Discussion Papers 10/05, Department of Economics, University of York.
    12. Hangyu Lee, 2014. "International Interest Rate Shocks and Monetary Policy in a Small Open Economy," Korean Economic Review, Korean Economic Association, vol. 30, pages 217-246.
    13. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.
    14. Ghironi, Fabio, 2008. "The role of net foreign assets in a New Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1780-1811, June.
    15. repec:onb:oenbwp:y::i:98:b:1 is not listed on IDEAS
    16. MacDonald, Ronald & Ricci, Luca Antonio, 2007. "Real exchange rates, imperfect substitutability, and imperfect competition," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 639-664, December.
    17. Tommaso Monacelli, 2003. "Commitment, Discretion and Fixed Exchange Rates in an Open Economy," Working Papers 233, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    18. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 295-330, March.
    19. Lenarčič, Črt, 2019. "Inflation – Harrod-Balassa-Samuelson effect in a DSGE model setting," MPRA Paper 101199, University Library of Munich, Germany.
    20. Hamza Ali Malik, 2006. "Monetary-Exchange Rate Policy and Current Account Dynamics," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 23-57.
    21. Couharde, Cécile & Delatte, Anne-Laure & Grekou, Carl & Mignon, Valérie & Morvillier, Florian, 2020. "Measuring the Balassa-Samuelson effect: A guidance note on the RPROD database," International Economics, Elsevier, vol. 161(C), pages 237-247.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jmoncb:v:40:y:2008:i:2-3:p:243-271. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.