Monetary Policy and Exchange Rate Regime: Proposal for a Small and Less Developed Economy

Jian Gao, Gang Gong and Xuezhong (Tony) He ()
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Jian Gao: China Development Bank
Gang Gong: School of Economics and Management, Tsinghua University

No 199, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We investigate monetary policy under the assumption that a country’s capital market is “open” under the WTO framework while the exchange rate is fixed. Our purpose is to determine if it is possible in this case for the economy to maintain an effective monetary policy for stabilizing the domestic economy. For this, we suggest two institutional restrictions. Given the restrictions, we demonstrate within a macro-dynamic model that monetary policy can still be effective. The implication of such an institutional design for an exchange rate regime is also discussed with special reference to small and less development economies.

Keywords: open economy trilemma; macroeconomic stability; exchange rate regime (search for similar items in EconPapers)
JEL-codes: C62 E12 E32 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2007-07-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:199

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