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Monetary Rules for Emerging Market Economies

Author

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  • Alessandro Rebucci

Abstract

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

Suggested Citation

  • Alessandro Rebucci, 2004. "Monetary Rules for Emerging Market Economies," Econometric Society 2004 North American Summer Meetings 644, Econometric Society.
    • Handle: RePEc:ecm:nasm04:644
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    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

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