TY - JOUR
T1 - Exchange rates and monetary policy in emerging market economies
AU - Devereux, Michael B.
AU - Lane, Philip R.
AU - Xu, Juanyi
PY - 2006/4
Y1 - 2006/4
N2 - We compare alternative monetary policies for an emerging market economy that experiences external shocks to interest rates and the terms of trade. Financial frictions magnify volatility but do not affect the ranking of alternative policy rules. In contrast, the degree of exchange rate passthrough is critical for the assessment of monetary rules. With high pass-through, stabilising the exchange rate involves a trade-off between real stability and inflation stability and the best monetary policy rule is to stabilise non-traded goods prices. With delayed pass-through, the trade-off disappears and the best monetary policy rule is CPI price stability.
AB - We compare alternative monetary policies for an emerging market economy that experiences external shocks to interest rates and the terms of trade. Financial frictions magnify volatility but do not affect the ranking of alternative policy rules. In contrast, the degree of exchange rate passthrough is critical for the assessment of monetary rules. With high pass-through, stabilising the exchange rate involves a trade-off between real stability and inflation stability and the best monetary policy rule is to stabilise non-traded goods prices. With delayed pass-through, the trade-off disappears and the best monetary policy rule is CPI price stability.
UR - https://www.webofscience.com/wos/woscc/full-record/WOS:000236461100006
UR - https://openalex.org/W3023649121
UR - https://www.scopus.com/pages/publications/33645469551
U2 - 10.1111/j.1468-0297.2006.01089.x
DO - 10.1111/j.1468-0297.2006.01089.x
M3 - Journal Article
SN - 0013-0133
VL - 116
SP - 478
EP - 506
JO - Economic Journal
JF - Economic Journal
IS - 511
ER -
