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Monetary Rules for Emerging Market Economies

  • Alessandro Rebucci

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.

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 644.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:644
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  19. Eric Parrado & Andres Velasco, 2002. "Optimal Interest Rate Policy in a Small Open Economy," NBER Working Papers 8721, National Bureau of Economic Research, Inc.
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