Monetary Policies for Developing Countries: The Role of Institutional Quality

Shang-Jin Wei and Haizhou Huang

No 4911, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Weak public institutions, including high levels of corruption, characterize many developing countries. With a simple model, we demonstrate that institutional quality has important implications for the design of monetary policies and can produce several departures from the conventional wisdom. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the problem of a lack of credibility, is typically not appropriate in developing countries with poor institutions. Such an arrangement is inferior to an optimal inflation targeting, or a Rogoff-style central banker, whose optimal degree of conservatism is proportional to the quality of institutions. Furthermore, our results cast doubt on the notion that a low inflationary target or a currency board can be used as an instrument to induce governments to strengthen quality of public institutions.

Keywords: Monetary policy; Corruption; Institutional quality; Inflation targeting; Dollarization; Conservative central banker; Currency board (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 E62 H50 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-afr, nep-mac, nep-mon and nep-pbe
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Citations: View citations in EconPapers (5)

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Journal Article: Monetary policies for developing countries: The role of institutional quality (2006)
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