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Monetary Policy in Emerging Markets, Labor Market Search and Exchange Rate Pass-Through

  • Fabián De Achával

    ()

    (University of Evry, EPEE and TEPP (FR N3126, CNRS))

  • Xavier Fairise

    ()

    (University of Evry, EPEE and TEPP (FR N3126, CNRS))

Standard small open economy models are often unsuitable to deal with the specific economic characteristics of emerging markets. In this paper we lay out a dynamic general-equilibrium model of an emerging small open economy in order to analyze the performance of alternative monetary policies. Our analysis incorporates to the model a non-walrasian labor market and an exchange rate pass-through to domestic prices. One of the central arguments of this paper is that the nature of the trade off between fixed and floating exchange rate regimes in emerging markets’ economies may be quite di¤erent to that of the industrial countries. In line with empirical evidence, our model predicts that countries exhibiting a high exchange rate pass-through will tend to smooth the exchange rate volatility.

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Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 08-13.

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Length: 38 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:eve:wpaper:08-13
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  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "Stabilization Policy and the Costs of Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 482-509, May.
  2. David Cook & Woon Gyu Choi, 2002. "Liability Dollarization and the Bank Balance Sheet Channel," IMF Working Papers 02/141, International Monetary Fund.
  3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers 233403, University of California-Berkeley, Department of Economics.
  4. Cooley, Thomas F & Quadrini, Vincenzo, 2001. "The Cost of Losing Monetary Independence: The Case of Mexico," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 370-97, May.
  5. Faia, Ester, 2009. "Ramsey monetary policy with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 570-581, May.
  6. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  7. Carlos Thomas, 2006. "Search and Matching Frictions and Optimal Monetary Policy," CEP Discussion Papers dp0743, Centre for Economic Performance, LSE.
  8. Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1600-1621, May.
  9. Moyen, S. & Sahuc, J-G., 2004. "Incorporating Labour Market Frictions into an Optimising-Based Monetary Policy Model," Working papers 105, Banque de France.
  10. Krause, Michael & López-Salido, J David & Lubik, Thomas, 2008. "Inflation Dynamics with Search Frictions: A Structural Econometric Analysis," CEPR Discussion Papers 6810, C.E.P.R. Discussion Papers.
  11. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  12. Walsh, Carl E., 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Center for International Economics, Working Paper Series qt6tg550dv, Center for International Economics, UC Santa Cruz.
  13. Chang, Roberto & Velasco, Andres, 2006. "Currency mismatches and monetary policy: A tale of two equilibria," Journal of International Economics, Elsevier, vol. 69(1), pages 150-175, June.
  14. Sveen, Tommy & Weinke, Lutz, 2008. "New Keynesian perspectives on labor market dynamics," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 921-930, July.
  15. Cook, David, 2004. "Monetary policy in emerging markets: Can liability dollarization explain contractionary devaluations?," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1155-1181, September.
  16. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  17. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  18. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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