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Monetary Rules for Emerging Market Economies

Author Info

Listed author(s):
  • Fabio Ghironi

    ()

    (Boston College)

  • Alessandro Rebucci

    ()

    (International Monetary Fund)

Abstract

We compare the performance of a currency board arrangement, inflation targeting, and dollarization in a small open, developing economy with liberalized capital account. We focus explicitly on the transmission of shocks to currency and country risk premia in international financial markets and on the role of fluctuations in premia in the propagation of other shocks. We calibrate our model on Argentina. The framework fits the data relatively well in that it matches the second moments of several key macro variables. Welfare analysis suggests that dollarization is preferable to the alternative regimes we consider because it removes the volatility that originates from the currency premium. However, a currency board can match dollarization if the central bank holds a sufficiently large stock of foreign reserves on average.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 476.

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Date of creation: 23 Oct 2000
Date of revision: 13 Aug 2001
Handle: RePEc:boc:bocoec:476
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Keywords: Argentina; Business cycles; Emerging markets; Monetary rules; Risk premium; Welfare;

Other versions of this item:

Find related papers by JEL classification:
  • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
  • 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
  • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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