Stability and transitions in emerging market policy rules

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: Conditions for stability in an open economy dynamic stochastic general equilibrium model adapted to a dualistic labor market (SOEME) are the same as for a mature economy. But the introduction of monetary policy transmission lags makes it deviate from the Taylor Principle. Under rational expectation a policy rule is unstable, but under adaptive expectations traditional stabilization gives a determinate path, with weights on the objective of less than unity. Estimation of a Taylor rule for India and optimization in the SOEME model itself, all confirm the low weights. The results imply that under rational expectations optimization is better than following a rule. If backward looking-behavior dominates, however, a policy rule can prevent overshooting and instability. Economy-specific rigidities must inform policy design, and the appropriate design will change as the economy develops.

Keywords: DSGE; emerging market; rigidities; stability; optimization; Taylor rule (search for similar items in EconPapers)
JEL-codes: E26 E52 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Related works:
Working Paper: Stability and Transitions in Emerging Market Policy Rules (2015)
Journal Article: Stability and Transitions in Emerging Market Policy Rules (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2015-003

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