Exchange Rates and Monetary Policy in Emerging Market Economies

29 Pages Posted: 8 May 2006

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

Juanyi Xu

University of British Columbia (UBC) - Department of Economics

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Abstract

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 pass-through 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.

Suggested Citation

Devereux, Michael B. and Lane, Philip R. and Xu, Juanyi, Exchange Rates and Monetary Policy in Emerging Market Economies. Economic Journal, Vol. 116, No. 115, pp. 478-506, April 2006. Available at SSRN: https://ssrn.com/abstract=894514 or http://dx.doi.org/10.1111/j.1468-0297.2006.01089.x

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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Centre for Economic Policy Research (CEPR)

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Central Bank of Ireland ( email )

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Dublin, 2
Ireland

Juanyi Xu

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

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada

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