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Monetary Rules for Emerging Market Economies

Fabio Ghironi () and Alessandro Rebucci ()

No 476, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We compare the performance of a currency board arrangement, inflation targeting, and dollarization in a small open, developing economy with liberalized capital account. We focus explicitly on the transmission of shocks to currency and country risk premia in international financial markets and on the role of fluctuations in premia in the propagation of other shocks. We calibrate our model on Argentina. The framework fits the data relatively well in that it matches the second moments of several key macro variables. Welfare analysis suggests that dollarization is preferable to the alternative regimes we consider because it removes the volatility that originates from the currency premium. However, a currency board can match dollarization if the central bank holds a sufficiently large stock of foreign reserves on average.

Keywords: Argentina; Business cycles; Emerging markets; Monetary rules; Risk premium; Welfare (search for similar items in EconPapers)
JEL-codes: C52 E52 F41 O54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2000-10-23, Revised 2001-08-13
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Related works:
Working Paper: Monetary Rules for Emerging Market Economies (2004)
Working Paper: Monetary Rules for Emerging Market Economies (2002) Downloads
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