Exchange Rates and Monetary Policy in Emerging Market Economies

Philip Lane and Michael Devereux

No 2874, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade. In particular, we highlight the impact of financial frictions and the degree of exchange rate pass through in determining the relative performance of alternative regimes in stabilizing the economy in the face of external shocks. Our results are quite sharp. When exchange rate pass-through is high, a policy of non-traded goods inflation targeting does best in stabilizing the economy, and is better in welfare terms. When exchange rate pass-through is low, however, a policy of strict CPI inflation targeting is better. In all cases, a fixed exchange rate is undesirable. In addition, financial frictions have no implications for the ranking of alternative policy rules

Keywords: Monetary policy; Pass-through; Financial frictions; Emerging markets (search for similar items in EconPapers)
JEL-codes: E50 F30 (search for similar items in EconPapers)
Date: 2001-07
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Citations: View citations in EconPapers (66)

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Related works:
Journal Article: Exchange Rates and Monetary Policy in Emerging Market Economies (2006)
Working Paper: Exchange Rates and Monetary Policy in Emerging Market Economies (2005)
Working Paper: Exchange Rates and Monetary Policy in Emerging Market Economies (2000)
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