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Monetary Policy in Sudden Stop-prone Economies

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  • Louphou Coulibaly

    (University of Montreal)

Abstract

Monetary policy procyclicality is a pervasive feature of emerging market economies. In this paper, I propose a parsimonious theory explaining this fact in a model where access to foreign financing depends on the real exchange rate and the government lacks commitment. The discretionary monetary policy is procyclical to mitigate balance sheet effects originating from exchange rate depreciations during sudden stops. Committing to an inflation targeting regime is found to increase social welfare and reduce the frequency of financial crises, despite increasing their severity. Finally, the ability to use capital controls induces a less procyclical discretionary monetary policy and delivers higher welfare gains than an inflation targeting regime by reducing both the frequency and the severity of crises.

Suggested Citation

  • Louphou Coulibaly, 2019. "Monetary Policy in Sudden Stop-prone Economies," 2019 Meeting Papers 529, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:529
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises

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