Incentives from Exchange Rate Regimes in an Institutional Context
In a simple open economy macromodel, calibrated to the typical institutions and shocks of a densely populated emerging market economy, it is shown that a monetary stimulus preceding a temporary supply shock can abort inflation at minimum output cost, since of the appreciation of exchange rates, accompanying a fall in interest rates and rise in output. Analytic results obtained for two periods are generalized through simulations and validated through estimation. The results imply that one instrument can, in these conditions, achieve both domestic output and exchange rate objectives, since it creates correct incentives for foreign exchange traders who make profits in supporting the policy. Such a policy response is compatible with political constraints; it also imparts limited volatility to the nominal exchange rate around a trend competitive rate, thus encouraging hedging and deepening markets. But strategic interactions imply the optimal policy need not be chosen; supporting institutions are required to coordinate monetary, fiscal policy, and markets to the optimal equilibrium. The analysis gives useful degrees of freedom for Asian emerging markets migrating to exchange rate regimes compatible with more openness.
|Date of creation:||Jan 2006|
|Contact details of provider:|| Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200|
Web page: http://www.eaber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Olivier Jeanne & Andrew K Rose, 1999.
"Noise trading and exchange rate regimes,"
Reserve Bank of New Zealand Discussion Paper Series
G99/2, Reserve Bank of New Zealand.
- Richard K. Lyons, 2006. "The Microstructure Approach to Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262205x.
- Robert H. Bates & Avner Greif & Margaret Levi & Jean-Laurent Rosenthal, 1998. "Analytic Narratives," Economics Books, Princeton University Press, edition 1, number 6355.
- Bhattacharya, Utpal & Weller, Paul, 1992.
"The Advantage to Hiding One's Hand: Speculation and Central Bank Intervention in the Foreign Exchange Market,"
CEPR Discussion Papers
737, C.E.P.R. Discussion Papers.
- Bhattacharya, Utpal & Weller, Paul, 1997. "The advantage to hiding one's hand: Speculation and central bank intervention in the foreign exchange market," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 251-277, July.
- Lars E. O. Svensson, 2000.
"Open-Economy Inflation Targeting,"
NBER Working Papers
6545, National Bureau of Economic Research, Inc.
- Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
- Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
- Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
- Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1999.
"Dualism and Macroeconomic Volatility,"
4554124, Harvard University Department of Economics.
- Goyal, Ashima, 2002. "Coordinating monetary and fiscal policies: a role for rules?," MPRA Paper 29200, University Library of Munich, Germany.
- Ghosh, Atish R., 2002. "Central bank secrecy in the foreign exchange market," European Economic Review, Elsevier, vol. 46(2), pages 253-272, February.
- Goyal, Ashima & Pujari, Ayan Kumar, 2005. "Identifying long run supply curve of India," MPRA Paper 24021, University Library of Munich, Germany.
- Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:eab:macroe:22375. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shiro Armstrong)
If references are entirely missing, you can add them using this form.