Facing the Quadrilemma: Taylor rules, intervention policy and capital controls in large emerging markets

Fernando Chertman, Michael Hutchison and David Zink

Journal of International Money and Finance, 2020, vol. 102, issue C

Abstract: This paper investigates extended Taylor rules and foreign exchange intervention functions in large Emerging Markets (EM), measuring the extent to which policies are designed to stabilize output, inflation, exchange rates and accumulate international reserves. We focus on two large emerging markets - India and Brazil. We also consider the impact of greater capital account openness and which rules dominate when policy conflicts arise. We find that output stabilization is a dominant characteristic of interest rate policy in India, as is inflation targeting in Brazil. Both countries actively use intervention policy to achieve exchange rate stabilization and, at times, stabilizing reserves around a target level tied to observable economic fundamentals. Large unpredicted intervention purchases (sales) accommodate low (high) interest rates, suggesting that external operations are subordinate to domestic policy objectives. We extend the work to Chile and China for purposes of comparison. Chile’s policy functions are similar to Brazil, while China pursues policies that substantially diverge from other EMs.

Keywords: Quadrilemma; Taylor rules; Intervention policy; Capital controls; Large emerging markets (search for similar items in EconPapers)
JEL-codes: E5 F31 F33 F41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:102:y:2020:i:c:s0261560619305601

DOI: 10.1016/j.jimonfin.2019.102122

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