Exchange Rate Pass-through,Unemployment and Optimal Implementable Monetary Policy Rule for Emerging Economies |
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Authors: | Chak Hung Jack Cheng |
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Institution: | 1. Johnson College of Business and Economics, University of South Carolina Upstate, Spartanburg, SC, USAjcheng@uscupstate.edu |
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Abstract: | AbstractThis paper develops a small open economy model with nominal rigidities and search-matching frictions to study the implications of exchange rate pass-through for monetary policy in emerging countries. I find that, with complete exchange rate pass-through, the optimal policy rule features unemployment targeting as well as inflation targeting. However, the welfare gain from responding to unemployment fluctuations diminishes as the rate of exchange rate pass-through to import prices decreases. With low exchange rate pass-through, the optimal monetary policy is strict inflation targeting. |
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Keywords: | Exchange rate pass-through unemployment search and matching frictions monetary policy |
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