Exchange Rates and Monetary Policy in Emerging Market Economies

47 Pages Posted: 1 Aug 2001

See all articles by Michael B. Devereux

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Philip R. Lane

Trinity College (Dublin) - Department of Economics; Centre for Economic Policy Research (CEPR); Central Bank of Ireland

Multiple version iconThere are 3 versions of this paper

Date Written: July 2001

Abstract

This Paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade. In particular, we highlight the impact of financial frictions and the degree of exchange rate pass through in determining the relative performance of alternative regimes in stabilizing the economy in the face of external shocks. Our results are quite sharp. When exchange rate pass-through is high, a policy of non-traded goods inflation targeting does best in stabilizing the economy, and is better in welfare terms. When exchange rate pass-through is low, however, a policy of strict CPI inflation targeting is better. In all cases, a fixed exchange rate is undesirable. In addition, financial frictions have no implications for the ranking of alternative policy rules.

Keywords: Monetary policy, pass-through, financial frictions, emerging markets

JEL Classification: E50, F30

Suggested Citation

Devereux, Michael B. and Lane, Philip R., Exchange Rates and Monetary Policy in Emerging Market Economies (July 2001). CEPR Discussion Paper No. 2874. Available at SSRN: https://ssrn.com/abstract=277307

Michael B. Devereux (Contact Author)

University of British Columbia (UBC) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Philip R. Lane

Trinity College (Dublin) - Department of Economics ( email )

Trinity College
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Ireland
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+353 1 677 2503 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Central Bank of Ireland ( email )

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Dame Street
Dublin, 2
Ireland

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