Monetary rules in an open economy with distortionary subsidies and inefficient shocks: A DSGE approach for Bolivia
Valeria Jemio Hurtado
MPRA Paper from University Library of Munich, Germany
Through an estimated and calibrated DSGE model with imperfect competition and nominal rigidities, this work aims to assess the dynamic effects of exogenous perturbations in a small open economy to provide a prescription of a simple monetary policy rule associated with the minimal welfare losses in the case of Bolivia. Following Gali and Monacelli (2005) and De Paoli (2009), I display the baseline model in a canonical representation. Yet, unlike them, I consider the presence of efficient and inefficient perturbations, namely government spending, productivity, foreign demand, and cost-push shocks, to analyze its effects in terms of observable variables but also on the relevant output gap. Moreover, considering the significance of raw materials as a proportion of the Bolivian exports, I extend the model by taking into account a distortionary subsidy on consumption financed by the positive profits of the commodity sector, Further, in the style of Gali and Monacelli (2005), I compare the welfare implications under two scenarios: A monetary rule focus on maintain a nominal exchange rate peg (fixed) regime and a Taylor rule. The main results reveal that the latter outperforms the former when the full set of shocks occurs simultaneously, showing the importance of inflation targeting. Yet, by focusing only on inefficient exogenous perturbations, and taking into account a pegged regime and a simple Taylor rule based on consumer and producer price inflation, the ranking of monetary policy aligns in the first place an exchange rate peg. This scenario shows the potential success of alternative simple monetary rules under these circumstances.
Keywords: Macroeconomics; Monetary Policy; Business Cycles; Bayessian Estimation (search for similar items in EconPapers)
JEL-codes: C11 C13 C15 E0 E12 E32 E52 E58 F41 F44 (search for similar items in EconPapers)
Date: 2020-07-14, Revised 2020-07-14
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/102374/1/MPRA_paper_102374.pdf original version (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:102374
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().