Monetary Policy under Financial Exclusion

Rajesh Singh
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Rajesh Singh: Iowa State University

No 76, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We investigate the welfare implications of alternative monetary policy rules in a small open economy with access to world capital markets. Financial market access is costly and induces an endogenous segmentation of households into non-traders who never participate and traders who only participate intermittently in asset markets. The model can reproduce standard business cycle moments of open economies including a countercyclical current account even though the model has no capital and investment. Our main policy result is that procyclical monetary policy outperforms both the Taylor rule and inflation targeting in this environment. Given widespread evidence of endemic financial exclusion throughout the world, these results suggest caution in importing monetary policy prescriptions tailored for developed countries into emerging economies.

Date: 2018
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:76

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