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Monetary Rules for Emerging Market Economies

Author/Editor: Ghironi, Fabio | Rebucci, Alessandro
Authorized for Distribution: February 1, 2002
Electronic Access: Free Full Text (PDF file size is 1,316KB)
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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: We compare the performance of a currency board, inflation targeting, and dollarization in a small, open developing economy with a liberalized capital account. We focus on the transmission of shocks to currency and country risk premia and on the role of fluctuations in premia in the propagation of other shocks. We calibrate our model on Argentina. The framework matches the second moments of key variables well. Welfare analysis suggests that dollarization is preferable to alternative regimes because it removes currency premium volatility. However, a currency board can match dollarization on welfare grounds if the central bank holds a sufficiently large stock of foreign reserves.
 
Series: Working Paper No. 02/34
Subject(s): Monetary policy | Argentina | Emerging markets | Business cycles | Exchange risk | Social policy | Economic models
Author's keyword(s): Argentina | business cycles | emerging markets | monetary rules | risk premia | welfare
 
English  
    Published:   February 1, 2002        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0342002   Pages:   41
    Price:   US$15.00
       
     
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