Monetary Policy Rules for Financially Vulnerable Economies

Eduardo Morón and Diego Winkelried

No 2003/039, IMF Working Papers from International Monetary Fund

Abstract: One distinguishable characteristic of emerging market economies is that they are not financially robust. These economies are incapable of smoothing out large external shocks, as sudden capital outflows imply large and abrupt swings in the real exchange rate. Using a small open-economy model, this paper examines alternative monetary policy rules for economies with different degrees of liability dollarization. The paper answers the question of how efficient it is to use inflation targeting under high liability dollarization. Our findings suggest that it might be optimal to follow a nonlinear policy rule that defends the real exchange rate in a financially vulnerable economy.

Keywords: WP; inflation targeting; monetary policy; risk premium; Liability Dollarization; Monetary Policy Rules; Latin America; vulnerable economy; exchange rate regime; regime case; nominal exchange rate; dollarized economy; robust economy; exchange rate fluctuation; Real exchange rates; Return on investment; Exchange rates; Exchange rate arrangements; Exchange rate flexibility; Australia and New Zealand (search for similar items in EconPapers)
Pages: 36
Date: 2003-02-01
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Citations: View citations in EconPapers (33)

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Related works:
Journal Article: Monetary policy rules for financially vulnerable economies (2005)
Working Paper: Monetary Policy Rules for Financially Vulnerable EconomieEd (2002)
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