Monetary Rules for Emerging Market Economies
Electronic Access:
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Summary:
We compare the performance of a currency board, inflation targeting, and dollarization in a small, open developing economy with a liberalized capital account. We focus on the transmission of shocks to currency and country risk premia and on the role of fluctuations in premia in the propagation of other shocks. We calibrate our model on Argentina. The framework matches the second moments of key variables well. Welfare analysis suggests that dollarization is preferable to alternative regimes because it removes currency premium volatility. However, a currency board can match dollarization on welfare grounds if the central bank holds a sufficiently large stock of foreign reserves.
Series:
Working Paper No. 2002/034
Subject:
Bonds Consumption Currencies Currency boards Dollarization Financial institutions Foreign exchange Monetary policy Money National accounts
English
Publication Date:
February 1, 2002
ISBN/ISSN:
9781451845273/1018-5941
Stock No:
WPIEA0342002
Pages:
41
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