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Distributional Effects of Monetary Policy in Emerging Market Economies

49 Pages Posted: 4 Sep 2015  

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Boyang Zhang

Cornell University, Department of Economics, Students

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Abstract

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

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

Eswar S. Prasad (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

440 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Boyang Zhang

Cornell University, Department of Economics, Students ( email )

Ithaca, NY
United States

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