49 Pages Posted: 4 Sep 2015
We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.
Keywords: monetary policy rules, exchange rate management, interest rate smoothing, distributional effects, emerging markets, financial frictions, inflation targeting
JEL Classification: E25, E52, E58, F41
Suggested Citation: Suggested Citation
Prasad, Eswar S. and Zhang, Boyang, Distributional Effects of Monetary Policy in Emerging Market Economies. IZA Discussion Paper No. 9272. Available at SSRN: https://ssrn.com/abstract=2655312