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Monetary Rules for Emerging Market Economies

  • Fabio Ghironi

    ()

    (Boston College)

  • Alessandro Rebucci

    ()

    (International Monetary Fund)

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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