Monetary Policy Rules for Financially Vulnerable Economies

February 1, 2003

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Format: Chicago

Eduardo Morón, and Diego Winkelried. Monetary Policy Rules for Financially Vulnerable Economies, (USA: International Monetary Fund, 2003) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

One distinguishable characteristic of emerging market economies is that they are not financially robust. These economies are incapable of smoothing out large external shocks, as sudden capital outflows imply large and abrupt swings in the real exchange rate. Using a small open-economy model, this paper examines alternative monetary policy rules for economies with different degrees of liability dollarization. The paper answers the question of how efficient it is to use inflation targeting under high liability dollarization. Our findings suggest that it might be optimal to follow a nonlinear policy rule that defends the real exchange rate in a financially vulnerable economy.

Subject: Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, National accounts, Real exchange rates, Return on investment

Keywords: Australia and New Zealand, Dollarized economy, Exchange rate arrangements, Exchange rate flexibility, Exchange rate fluctuation, Exchange rate regime, Exchange rates, Inflation targeting, Latin America, Liability Dollarization, Monetary policy, Monetary Policy Rules, Nominal exchange rate, Real exchange rates, Regime case, Return on investment, Risk premium, Robust economy, Vulnerable economy, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/039
Stock No:

WPIEA0392003
ISBN:

9781451845853
ISSN:

1018-5941

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