Facing the Quadrilemma: Taylor Rules, Intervention Policy and Capital Controls in Large Emerging Markets

Fernando Chertman, Michael Hutchison () and David Zink
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Fernando Chertman: University of California, Santa Cruz
Michael Hutchison: University of California, Santa Cruz
David Zink: University of California, Santa Cruz

No GRU_2019_016, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: This paper investigates extended Taylor rules and foreign exchange intervention functions in large Emerging Markets (EM), measuring the extent to which policies are designed to stabilize output, inflation, exchange rates and accumulate international reserves. We focus on two large emerging markets--India and Brazil. We also consider the impact of greater capital account openness and which rules dominate when policy conflicts arise. We find that output stabilization is a dominant characteristic of interest rate policy in India, as is inflation targeting in Brazil. Both countries actively use intervention policy to achieve exchange rate stabilization and, at times, stabilizing reserves around a target level tied to observable economic fundamentals. Large unpredicted intervention purchases (sales) accommodate low (high) interest rates, suggesting that external operations are subordinate to domestic policy objectives. We extend the work to Chile and China for purposes of comparison. Chile’s policy functions are similar to Brazil, while China pursues policies that substantially diverge from other EMs.

Pages: 45 pages
Date: 2019-08-10
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:cth:wpaper:gru_2019_016

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