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Distributional Effects of Monetary Policy in Emerging Market Economies

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  • Prasad, Eswar

    () (Cornell University)

  • Zhang, Boyang

    () (Cornell University)

Abstract

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.

Suggested Citation

  • Prasad, Eswar & Zhang, Boyang, 2015. "Distributional Effects of Monetary Policy in Emerging Market Economies," IZA Discussion Papers 9272, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp9272
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    Cited by:

    1. Iyer, Tara, 2016. "Optimal Monetary Policy in an Open Emerging Market Economy," Working Paper Series WP-2016-6, Federal Reserve Bank of Chicago.

    More about this item

    Keywords

    monetary policy rules; exchange rate management; interest rate smoothing; distributional effects; emerging markets; financial frictions; inflation targeting;

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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