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Monetary Policy Rules for Financially Vulnerable Economies

Author

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  • Mr. Eduardo Morón
  • Mr. Diego Winkelried

Abstract

One distinguishable characteristic of emerging market economies is that they are not financially robust. These economies are incapable of smoothing out large external shocks, as sudden capital outflows imply large and abrupt swings in the real exchange rate. Using a small open-economy model, this paper examines alternative monetary policy rules for economies with different degrees of liability dollarization. The paper answers the question of how efficient it is to use inflation targeting under high liability dollarization. Our findings suggest that it might be optimal to follow a nonlinear policy rule that defends the real exchange rate in a financially vulnerable economy.

Suggested Citation

  • Mr. Eduardo Morón & Mr. Diego Winkelried, 2003. "Monetary Policy Rules for Financially Vulnerable Economies," IMF Working Papers 2003/039, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2003/039
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    More about this item

    Keywords

    WP; inflation targeting; monetary policy; risk premium; Liability Dollarization; Monetary Policy Rules; Latin America; vulnerable economy; exchange rate regime; regime case; nominal exchange rate; dollarized economy; robust economy; exchange rate fluctuation; Real exchange rates; Return on investment; Exchange rates; Exchange rate arrangements; Exchange rate flexibility; Australia and New Zealand;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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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