Stability and policy rules in emerging markets

Ashima Goyal and Shruti Tripathi ()
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Shruti Tripathi: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: Stability results for an open economy DSGE adapted to an emerging market (SOEME) with a dualistic structure have the same structure as in the original model, but those derived for the simulated version turn out to impose no restriction on the coefficient of inflation, but rather a threshold on the coefficient of the output gap. Other rigidities, lags and some degree of backward looking behavior in the simulated SOEME model arising from its calibration to an emerging market, may be helping provide a nominal anchor. Estimation of a Taylor rule for India, simulations in the SOEME model itself and a variant with government debt, confirm the analytical result. Implications are, first, optimization can be as effective as following a monetary policy rule. Second, knowledge of the specific rigidities in an economy can give useful inputs for the design of policy-their effect on stability should be more carefully researched.

Keywords: DSGE; emerging economy; rigidities; stability; optimization; Taylor rule (search for similar items in EconPapers)
JEL-codes: E26 E52 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-01
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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