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Distributional Effects of Monetary Policy in Emerging Market Economies

Listed author(s):
  • Prasad, Eswar

    ()

    (Cornell University)

  • Zhang, Boyang

    ()

    (Cornell University)

We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 9272.

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Length: 49 pages
Date of creation: Aug 2015
Handle: RePEc:iza:izadps:dp9272
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