Monetary Policy Choices in Emerging Market Economies: The Case of High Productivity Growth

Santa Cruz Center for International Economics Working Paper No. 08-01

39 Pages Posted: 8 Sep 2008

See all articles by Fabio M. Natalucci

Fabio M. Natalucci

U.S. Federal Reserve Board - Division of Monetary Affairs

Federico Ravenna

HEC Montreal

Date Written: July 9, 2008

Abstract

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 Balassa-Samuelson effect raises by an order of magnitude the welfare loss associated with policy rules that prescribe active exchange rate management.

Keywords: Balassa-Samuelson Effect, Optimal Monetary Policy, Exchange Rate Regimes, Emerging Markets European Monetary Union

JEL Classification: E52, E31, F02, F41

Suggested Citation

Natalucci, Fabio Massimo and Ravenna, Federico, Monetary Policy Choices in Emerging Market Economies: The Case of High Productivity Growth (July 9, 2008). Santa Cruz Center for International Economics Working Paper No. 08-01, Available at SSRN: https://ssrn.com/abstract=1263940 or http://dx.doi.org/10.2139/ssrn.1263940

Fabio Massimo Natalucci

U.S. Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Street, N.W.
Washington, DC 20551
United States
202-452-3052 (Phone)
202-736-5638 (Fax)

Federico Ravenna (Contact Author)

HEC Montreal ( email )

3000 Cote St Catherine
montreal, Quebec
Canada

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