Monetary policy rules in transition economies: the impact of ambiguity

Subrata Ghatak () and Willem Spanjers ()
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Subrata Ghatak: Kingston University London
Willem Spanjers: Kingston University London

No 2007-2, Economics Discussion Papers from School of Economics, Kingston University London

Abstract: This paper discusses the potential benefits of monetary policy rules for transition economies [TEs]. It is argued that the nominal interest rate may fail to be the appropriate instrument in such rules. One reason is the amount of non-calculable political and economic risk inherent in TEs. These risks lead to a significant and volatile ambiguity premium in the interest rate over and above the normal risk premium, which makes the real equilibrium interest rate difficult to measure. Therefore, a monetary aggregate like the money base may be more appropriate as the instrument for monetary policy rules in TEs.

Keywords: Monetary Policy; Transition Economies; Political Risk; Ambiguity (search for similar items in EconPapers)
JEL-codes: E50 E52 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007-02-20
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Citations: View citations in EconPapers (4)

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