Monetary Policy in a Small Emerging Economy: Exploring Desirable Interest Rate Rules

Ehsan Choudhri ()

SBP Research Bulletin, 2006, vol. 2, 5-20

Abstract: Although there is considerable literature on optimal interest rate rules for industrial countries, little research has been undertaken to investigate suitable rules for emerging countries that confront a different mix of shocks and have a fear of floating. This paper uses a stochastic dynamic general equilibrium model to explore desirable interest rate rules for a small emerging economy. The relative performance of different rules is shown to depend on the criterion used for evaluation and the type of shocks faced by the economy. The paper identifies conditions under which a vigorous inflation targeting policy is desirable even in the presence of concerns about exchange rate variability.

Date: 2006
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