Policy Rules and Large Crises in Emerging Markets

Emilio Espino, Julian Kozlowski, Fernando Martin and Juan Sanchez

No 2022-018, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Emerging economies have adopted fiscal and monetary rules to discipline government policy. We study the value and macroeconomic implications of rules and flexibility within a sovereign-default model that incorporates domestic fiscal and monetary policies and long-term external debt. Adopting monetary targets and debt limits during normal times yields welfare gains. Suspending rules can significantly influence policy, macroeconomic outcomes, and welfare during large, unforeseen crises. The gains from flexibility depend on how quickly policymakers are able to reimpose rules after the crisis.

Keywords: crises; default; sovereign debt; emerging markets; exchange rate; inflation; fiscal policy; monetary policy; rules; discretion; Markov-perfect equilibrium; COVID-19 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2022-08-31, Revised 2024-06-27
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-ifn and nep-opm
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DOI: 10.20955/wp.2022.018

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