Monetary Policy in Sudden Stop-Prone Economies

Louphou Coulibaly

American Economic Journal: Macroeconomics, 2023, vol. 15, issue 4, 141-76

Abstract: This paper proposes a parsimonious theory explaining the cyclicality of monetary policy in emerging countries 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.

JEL-codes: E31 E32 E44 E52 F31 F33 F38 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Monetary Policy in Sudden Stop-prone Economies (2019)
Working Paper: Monetary policy in sudden stop-prone economies (2018)
Working Paper: Monetary Policy in Sudden Stop-Prone Economies (2018)
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DOI: 10.1257/mac.20200201

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