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Monetary policy and commodity terms of trade shocks in emerging market economies

  • Seedwell Hove
  • Albert Touna Mama
  • Fulbert Tchana Tchana

Commodity terms of trade shocks have continued to drive macroeconomic ‡uctuations in most emerging market economies. The volatility and persistence of these shocks have posed great challenges for monetary policy. This study employs a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to evaluate the optimal monetary policy responses to commodity terms of trade shocks in commodity dependent emerging market economies. The model is calibrated to the South African economy. The study shows that CPI in‡ation targeting performs relatively better than exchange rate targeting and non-traded in‡ation targeting both in terms of reducing macroeconomic volatility and enhancing welfare. However, macroeconomic stabilisation comes at a cost of increased exchange rate volatility. The results suggest that the appropriate response to commodity induced exogeneous shocks is to target CPI inflation.

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Paper provided by Economic Research Southern Africa in its series Working Papers with number 307.

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Length: 27 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:rza:wpaper:307
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