A General equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market

Ashima Goyal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: An optimizing model of a small open emerging market economy (SOEME) with dualistic labour markets and two types of consumers, delivers a tractable model for monetary policy. Differences between the SOEME and the SOE are derived. Parameters depend on features of the labour market and on consumption inequality, and affect the natural interest rate, terms of trade and potential output. The supply curve turns out to be flatter and more volatile, with a larger number of shift factors. A simple basic version of the model is simulated in order to compare different policy targets in response to a cost shock. Flexible domestic inflation targeting delivers stability and the lowest volatility. Some weight on output and on interest smoothing allows monetary policy to be less contractionary. Exchange rate flexibility is less but still makes a major contribution to controlling inflation.

Keywords: small open emerging market; optimal monetary policy; dualistic labour markets; terms of trade; potential output (search for similar items in EconPapers)
JEL-codes: E52 F41 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2007-10
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: A general equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market (2011)
Working Paper: A General Equilibrium Open Economy Model for Emerging Markets - Monetary Policy with a Dualistic Labor Market (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2007-016

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