Monetary Policy Choices in Emerging Market Economies: The Case of High Productivity Growth |
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Authors: | FEDERICO RAVENNA FABIO M NATALUCCI† |
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Institution: | Federico Ravenna;is from the Department of Economics, University of California-Santa Cruz, CA 95064 and Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105 (E-mail:). Fabio M. Natalucci;is from the Federal Reserve Board, Division of Monetary Affairs, MS 81, Washington, DC 20551 (E-mail:). |
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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 B–S effect raises by an order of magnitude the welfare loss associated with policy rules that prescribe active exchange rate management. |
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Keywords: | E52 E31 F02 F41 |
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