Incentives from exchange rate regimes in an institutional context

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dc.contributor.author Goyal, Ashima
dc.date.accessioned 2012-05-29T07:13:31Z
dc.date.available 2012-05-29T07:13:31Z
dc.date.issued 2012-05-29
dc.identifier.uri http://hdl.handle.net/2275/46
dc.description.abstract In a simple open economy macromodel, calibrated to the typical institutions and shocks of a densely populated emerging market economy, it is shown that a monetary stimulus preceding a temporary supply shock can abort inflation at minimum output cost, since of the appreciation of exchange rates, accompanying a fall in interest rates and rise in output. Analytic results obtained for two periods are generalized through simulations and validated through estimation. The results imply that one instrument can, in these conditions, achieve both domestic output and exchange rate objectives, since it creates correct incentives for foreign exchange traders who make profits in supporting the policy. Such a policy response is compatible with political constraints; it also imparts limited volatility to the nominal exchange rate around a trend competitive rate, thus encouraging hedging and deepening markets. But strategic interactions imply the optimal policy need not be chosen; supporting institutions are required to coordinate monetary, fiscal policy, and markets to the optimal equilibrium. The analysis gives useful degrees of freedom for Asian emerging markets migrating to exchange rate regimes compatible with more openness. en_US
dc.language.iso en en_US
dc.relation.ispartofseries WP;WP-2006-015R
dc.subject Emerging market economy en_US
dc.subject Mundell-Fleming en_US
dc.subject monetary policy en_US
dc.subject FX market en_US
dc.subject supply shocks en_US
dc.title Incentives from exchange rate regimes in an institutional context en_US
dc.type Working Paper en_US

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