 Stability and Transitions in Emerging Market Policy RulesWorking Papers from eSocialSciences Abstract: Conditions for stability in an open economy dynamic stochastic general equilibrium model adapted to a dualistic labor market (SOEME) are the same as for a mature economy. But the introduction of monetary policy transmission lags makes it deviate from the Taylor Principle. Under rational expectation a policy rule is unstable, but under adaptive expectations traditional stabilization gives a determinate path, with weights on the objective of less than unity. Estimation of a Taylor rule for India and optimization in the SOEME model itself, all confirm the low weights. The results imply that under rational expectations optimization is better than following a rule. If backward looking-behaviour dominates, however, a policy rule can prevent overshooting and instability. Economy-specific rigidities must inform policy design, and the appropriate design will change as the economy develops. Keywords: DSGE; emerging market; rigidities; stability; optimization, Taylor rule, policy, SOEME model, stabilization, economy, inflation, nominal interest rate, central bank, consumption, aggregate demand (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ess:wpaper:id:6577 Access Statistics for this paper More papers in Working Papers from eSocialSciences |
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