Monetary Policy Rules for Financially Vulnerable Economies

Author/Editor:

Eduardo Morón ; Diego Winkelried

Publication Date:

February 1, 2003

Electronic Access:

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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:

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.

Series:

Working Paper No. 2003/039

Subject:

English

Publication Date:

February 1, 2003

ISBN/ISSN:

9781451845853/1018-5941

Stock No:

WPIEA0392003

Pages:

36

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