This setting lets you change the way you view articles. You can choose to have articles open in a dialog window, a new tab, or directly in the same window.
Open in Dialog
Open in New Tab
Open in same window

American Economic Review: Vol. 93 No. 2 (May 2003)


Quick Tools:

Print Article Summary
Export Citation
Sign up for Email Alerts Follow us on Twitter


AER - All Issues

AER Forthcoming Articles

Monetary Policy Under Imperfect Capital Markets in a Small Open Economy

Article Citation

Tuladhar, Anita. 2003. "Monetary Policy Under Imperfect Capital Markets in a Small Open Economy ." American Economic Review, 93(2): 266-270.

DOI: 10.1257/000282803321947173


Following the financial crises of the late 1990's an increasing number of emergingmarket countries have adopted a flexible exchange-rate regime and an inflation-targeting monetary-policy framework. This trend has generated a growing debate on the appropriate monetary-policy rule for "financially fragile" economies with thin and incomplete financial markets that are subject to highly volatile capital flows. Within this context, I examine the implications of alternative monetary-policy rules and the choice of instruments and targets in a small open economy with imperfect capital markets. I compare a benchmark efficient-markets model with a monetary-targeting regime and three different inflation-targeting rules: the Taylor rule, a CPI inflation-target rule, and a non-tradable inflation-target rule. Furthermore, I study how sensitive the results are to varying degrees of capital-market integration. In addressing this question of the "second best" policy, the paper resembles that of Michael Devereaux and Phillip Lane (2001), who study the role of financial accelerator effects on various monetary-policy rules. I adopt a small open-economy setup rather than a two-country framework. In contrast to most small open-economy models, however, this paper does not assume a zero current-account balance. Net foreign-asset holdings and capital flows affect real volatility through the interest-rate risk premium. Given the significant role the risk premium plays in the external borrowing costs for emerging markets, this channel may have important consequences for economic dynamics.

Article Full-Text Access

Full-text Article


Tuladhar, Anita

American Economic Review

Quick Tools:

Sign up for Email Alerts

Follow us on Twitter

Subscription Information
(Institutional Administrator Access)


AER - All Issues

AER - Forthcoming Articles

Virtual Field Journals

AEA Member Login:

AEAweb | AEA Journals | Contact Us