MONETARY POLICY RULES FOR SMALL AND OPEN DEVELOPING ECONOMIES: A COUNTERFACTUAL POLICY ANALYSIS

Tony Cavoli () and Ramkishen Rajan
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Tony Cavoli: School of Economics and Finance, Queensland University of Technology

Journal of Economic Development, 2006, vol. 31, issue 1, 89-111

Abstract: This paper uses a model calibrated to suit a small open Asian economy to present a series of counterfactual policy experiments aimed at comparing conventional optimal inflation targeting (IT) under commitment and discretion and variations of simple fixed monetary policy rules (MPRs). Two significant points of departure between the model presented here and previous ones for industrial countries are the incorporation of the real exchange rate and consideration of possible contractionary depreciation/devaluation. This represents a realistic scenario for some Asian economies after the crisis. In assessing the impact of different policy types it is essential to find parameters for model calibration that suitably represent the small and open Asian economies that have recently implemented inflation targeting arrangements. We have used estimates from Thailand over a recent period (1993-2003) to assist in selecting these parameters.

Keywords: Asia; Developing Economy; Exchange Rate; Inflation Targeting (IT); Monetary Policy Rules (MPRs) (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 F41 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (23)

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