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Stability and policy rules in emerging markets

Author

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

  • Shruti Tripathi

    (Indira Gandhi Institute of Development Research)

Abstract

Stability results for an open economy DSGE adapted to an emerging market (SOEME) with a dualistic structure have the same structure as in the original model, but those derived for the simulated version turn out to impose no restriction on the coefficient of inflation, but rather a threshold on the coefficient of the output gap. Other rigidities, lags and some degree of backward looking behavior in the simulated SOEME model arising from its calibration to an emerging market, may be helping provide a nominal anchor. Estimation of a Taylor rule for India, simulations in the SOEME model itself and a variant with government debt, confirm the analytical result. Implications are, first, optimization can be as effective as following a monetary policy rule. Second, knowledge of the specific rigidities in an economy can give useful inputs for the design of policy-their effect on stability should be more carefully researched.

Suggested Citation

  • 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.
    • Handle: RePEc:ind:igiwpp:2012-004
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2012-004.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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.

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    More about this item

    Keywords

    DSGE; emerging economy; rigidities; stability; optimization; Taylor rule;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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