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Monetary Policy Choices in Emerging Market Economies: The Case of High Productivity Growth
Author(s) -
RAVENNA FEDERICO,
NATALUCCI FABIO M.
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00112.x
Subject(s) - economics , productivity , exchange rate , welfare , monetary policy , inflation (cosmology) , order (exchange) , general equilibrium theory , monetary economics , macroeconomics , market economy , physics , finance , theoretical physics
We develop a general equilibrium model of an emerging market economy where productivity growth differentials between tradable and non‐tradable sectors result in an equilibrium appreciation of the real exchange rate—the so‐called Balassa‐Samuelson effect. The paper explores the dynamic properties of this economy and the welfare implications of alternative policy rules. We show that the real exchange rate appreciation limits the range of policy rules that, with a given probability, keep inflation and exchange rate within predetermined numerical targets. We also find that the B–S effect raises by an order of magnitude the welfare loss associated with policy rules that prescribe active exchange rate management.