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Distributional Effects of Monetary Policy in Emerging Market Economies

Eswar Prasad and Boyang Zhang ()

No 9272, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.

Keywords: monetary policy rules; exchange rate management; interest rate smoothing; distributional effects; emerging markets; financial frictions; inflation targeting (search for similar items in EconPapers)
JEL-codes: E25 E52 E58 F41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2015-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ger, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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