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A General Equilibrium Open Economy Model for Emerging Markets - Monetary Policy with a Dualistic Labor Market

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

Abstract

An optimizing model of a small open emerging market economy (SOEME) with dualistic labour markets and two types of consumers, delivers a tractable model for monetary policy. Differences between the SOEME and the SOE are derived. Parameters depend on features of the labour market and on consumption inequality, and affect the natural interest rate, terms of trade and potential output. The supply curve turns out to be flatter and more volatile, with a larger number of shift factors. A simple basic version of the model is simulated in order to compare different policy targets in response to a cost shock. Flexible domestic inflation targeting delivers stability and the lowest volatility. Some weight on output and on interest smoothing allows monetary policy to be less contractionary. Exchange rate flexibility is less but still makes a major contribution to controlling inflation.

Suggested Citation

  • Ashima Goyal, 2007. "A General Equilibrium Open Economy Model for Emerging Markets - Monetary Policy with a Dualistic Labor Market," Macroeconomics Working Papers 22377, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:macroe:22377
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    References listed on IDEAS

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    1. Arminio Fraga & Ilan Goldfajn & André Minella, 2004. "Inflation Targeting in Emerging Market Economies," NBER Chapters,in: NBER Macroeconomics Annual 2003, Volume 18, pages 365-416 National Bureau of Economic Research, Inc.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach," NBER Working Papers 8604, National Bureau of Economic Research, Inc.
    4. Ashima Goyal, 2011. "Sustainable debt and deficits in Emerging Markets," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, vol. 4(2), pages 113-136.
    5. Ashima Goyal, 2005. "Incentives from exchange rate regimes in an institutional context," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2005-002, Indira Gandhi Institute of Development Research, Mumbai, India.
    6. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    7. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
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    Citations

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    Cited by:

    1. Ashima Goyal, 2014. "History of Monetary Policy in India Since Independence," SpringerBriefs in Economics, Springer, edition 127, number 978-81-322-1961-3, August.
    2. Ashima Goyal, 2016. "Abductive Reasoning in Macroeconomics," Working Papers id:11272, eSocialSciences.
    3. Ashima Goyal & Sanchit Arora, 2013. "Estimating the Indian natural interest rate and evaluating policy," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-017, Indira Gandhi Institute of Development Research, Mumbai, India.
    4. Goyal, Ashima & Tripathi, Shruti, 2014. "Stability and Transitions in Emerging Market Policy Rules," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 49(2), pages 153-172.
    5. Ashima Goyal & Abhishek Kumar, 2017. "A DSGE model-based analysis of the Indian slowdown," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2017-003, Indira Gandhi Institute of Development Research, Mumbai, India.
    6. Ashima Goyal & Shruti Tripathi, 2012. "Stability and policy rules in emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-004, Indira Gandhi Institute of Development Research, Mumbai, India.
    7. Parantap Basu & Shesadri Banerjee, 2015. "Role of IST and TFP Shocks in Business Cycle Fluctuations: The Case of India," CEGAP Working Papers 2015_04, Durham University Business School.
    8. Goyal, Ashima, 2012. "Propagation Mechanisms in Inflation: Governance as key," MPRA Paper 46360, University Library of Munich, Germany.
    9. Ashima Goyal & Sanchit Arora, 2012. "Deriving India's Potential growth from theory and structure," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-018, Indira Gandhi Institute of Development Research, Mumbai, India.
    10. Mishra, Ankita & Mishra, Vinod, 2012. "Evaluating inflation targeting as a monetary policy objective for India," Economic Modelling, Elsevier, vol. 29(4), pages 1053-1063.
    11. Goyal, Ashima & Arora, Sanchit, 2016. "Estimating the Indian natural interest rate: A semi-structural approach," Economic Modelling, Elsevier, vol. 58(C), pages 141-153.

    More about this item

    Keywords

    small open emerging market; optimal monetary policy; dualistic labour markets; Terms of Trade; Potential output;

    JEL classification:

    • 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

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