American Economic Journal: Macroeconomics
no. 4, October 2023
This paper proposes a parsimonious theory explaining the cyclicality of monetary policy in emerging countries in a model where access to foreign financing depends on the real exchange rate and the government lacks commitment. The discretionary monetary policy is procyclical to mitigate balance sheet effects originating from exchange rate depreciations during sudden stops. Committing to an inflation targeting regime is found to increase social welfare and reduce the frequency of financial crises despite increasing their severity. Finally, the ability to use capital controls induces a less procyclical discretionary monetary policy and delivers higher welfare gains than an inflation targeting regime.
"Monetary Policy in Sudden Stop-Prone Economies."
American Economic Journal: Macroeconomics,
Price Level; Inflation; Deflation
Business Fluctuations; Cycles
Financial Markets and the Macroeconomy
International Monetary Arrangements and Institutions
International Financial Policy: Financial Transactions Tax; Capital Controls