Monetary Policy in Sudden Stop-prone Economies

Louphou Coulibaly

No 529, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Monetary policy procyclicality is a pervasive feature of emerging market economies. In this paper, I propose a parsimonious theory explaining this fact in a model where access to foreign financing depends on the real exchange rate and the government lacks commitment. The discretionary monetary policy is procyclical to mitigate balance sheet effects originating from exchange rate depreciations during sudden stops. Committing to an inflation targeting regime is found to increase social welfare and reduce the frequency of financial crises, despite increasing their severity. Finally, the ability to use capital controls induces a less procyclical discretionary monetary policy and delivers higher welfare gains than an inflation targeting regime by reducing both the frequency and the severity of crises.

Date: 2019
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Monetary Policy in Sudden Stop-Prone Economies (2023)
Working Paper: Monetary policy in sudden stop-prone economies (2018)
Working Paper: Monetary Policy in Sudden Stop-Prone Economies (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:529

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