Back Matter

Back Matter

Anna Nordstrom, Scott Roger, Mark Stone, Seiichi Shimizu, Turgut Kisinbay, and Jorge Restrepo
Published Date:
November 2009
    • ShareShare
    Show Summary Details
    Appendix I
    Table A1.1.Intervention Practices of Inflation-Targeting Countries, Late 2007

    Rate Regime


    Frequency of


    Level of







    Data Published
    BrazilIndependently floating– Level of foreign exchange reserves

    – Excess volatility
    Weekly or more– Foreign

    – exchange

    – linked debt instruments denominated in domestic currency

    – Auctions
    Emerging; spot, onshore forwards (for onshore entities), swaps nondeliverable forwards, and optionsYesYes– Monthly level of reserves

    – Information through auctions
    – BIS Paper No. 24

    – IMF Annual Report on Exchange Arrangements and Exchange Agreements (AREAER), 2006

    – Central bank website

    – HSBC’s Guide to Emerging Market Currencies, 2008
    CanadaIndependently floating– Market breakdown

    – Extreme currency volatility
    NeverDiscretionary interventionsDeveloped; spot, forwards, swaps, and optionsYesYesMonthly– Central bank website
    ChileIndependently floating– Signal exchange rate misalignment

    – Excess volatility
    Never– Discretionary interventions

    – Issuance of U.S. dollar– denominated debt
    Emerging; spot, forwards (residents) swaps, nondeliverable forwards, and options Note: The Chilean peso is nondeliverable offshoreYesYesTwo– week lag– BIS Paper No. 24 – AREAER, 2006

    – Central bank website

    – HSBC’s Guide to Emerging Market Currencies, 2008
    ColombiaManaged floating– Excess volatility – Accumulate foreign exchange reservesMonthly, to accumulate foreign exchange reserves. Rule based for excess volatilityAuctions of put or call optionsEmerging; spot, forwards, nondeliverable forwards, and options Note: The Colombian peso is nondeliverable offshoreNot automaticallyYes– Auction amount at time of operation

    – Monthly interventions through options
    – BIS Paper No. 24 – AREAER, 2006

    – HSBC’s Guide to Emerging Market Currencies, 2008
    Czech RepublicManaged floating– Excess volatility (in an environment of exchange rate misalignment)OccasionallyDiscretionary interventionsEmerging; spot, forwards, swaps, and optionsYesYesMonthly amount with a two– month lag– BIS Paper No. 24 – AREAER, 2006

    – HSBC’s Guide to Emerging Market Currencies, 2008
    HungaryPegged exchange rate within horizontal bands– Maintain exchange rate peg

    – Excess volatility
    Never– Discretionary interventions – AuctionsEmerging; spot, forwards, swaps, and optionsYesYesMonthly level of foreign reserves–AREAER, 2006

    –Central bank website

    –HSBC’s Guide to Emerging Market Currencies, 2008
    IcelandIndependently floating– Preserve inflation target

    – Preserve financial stability
    Never– Discretionary – Almost exclusively in the spot marketDeveloped; spot, forwards, swaps, and optionsDesign of repo operations implies sterilization on demand from banksYesMonthly–AREAER, 2006

    –Central bank website
    IndonesiaManaged floating–Maintain exchange rate stabilityN/A–Mainly through the spot market

    –Directly in the market or via an agent bank (closed method)

    –Moral suasion
    Emerging; spot, forwards, swaps, nondeliverable forwards, and options Note: Certain documentation requirements applyN/AYesMonthly level of foreign reserves–BIS Paper No. 24 -AREAER, 2006

    –Central bank website

    –Asian Currency Handbook, 2006

    –Deutsche Bank

    –HSBC’s Guide to Emerging Market Currencies, 2008
    MexicoIndependently floating–Stabilize foreign exchange markets

    –Manage level of foreign exchange reserves

    –Discretionary interventions (under extreme circumstances)
    Emerging; spot, forwards, swaps, and options Note: Mexico is the only Latin American country that operates a deliverable forward market open to nonresident investor.YesYes–Transparency through auctions

    –Monthly level of foreign reserves
    –BIS Paper No. 24 -AREAER, 2006

    –Central bank website

    –HSBC’s Guide to Emerging Market Currencies, 2008
    New ZealandIndependently floating–Moderate extremes in the exchange rate cycleRarely3Interbank spot marketDeveloped; spot, forwards, swaps, and optionsYesNoMonthly financial accounts–AREAER, 2006

    – Central bank website
    NorwayIndependently floating–Exchange rate misalignmentNeverDiscretionary interventionsDeveloped; spot, forwards, swaps, and optionsYesYesMonthly level of foreign reserves–AREAER, 2006

    –Central bank website

    –BIS Paper No. 24
    PeruManaged floating–Excess volatilityWeekly or moreDiscretionary interventionsEmerging; spot, forwards, non-deliverable forwards, and options Note: A main characteristic is dual currencies; local currency and U.S. dollars are both accepted currenciesYesYesDaily–AREAER, 2006

    –Central bank website

    –HSBC’s Guide to Emerging Market Currencies, 2008
    PhilippinesIndependently floating–Maintain orderly conditions in the foreign exchange marketWeekly or moreDiscretionary interventionsEmerging; spot, forwards, swaps, nondeliverable forwards, and options Note: Turnover in nondeliverable forwards is low compared with other Asian currenciesYesYesMonthly level of foreign reserves–AREAER, 2006

    –Central bank website

    – HSBC’s Guide to Emerging Market Currencies, 2008

    –Asian Currency Handbook, 2006

    –Deutsche Bank
    PolandIndependently floating–Manage exchange rate developments that threaten the inflation targetN/ADiscretionary interventionsEmerging; spot, forwards, swaps, nondeliverable forwards, and optionsYesYesMonthly level of foreign reserves–BIS Paper No. 24 -AREAER, 2006

    –Central bank website

    –HSBC’s Guide to Emerging Market Currencies, 2007
    SingaporeManaged floating–Exchange rate is an intermediate target (policy band set on a six-month basis)Weekly or moreDiscretionary interventionsEmerging; spot, forwards, swaps, and optionsYesYesMonthly level of foreign reserves–AREAER, 2006

    –Central bank website
    Slovak RepublicExchange rate peg; ±15% horizontal band (European exchange rate mechanism II)– Maintain exchange rate pegRarelyDiscretionary interventionsEmerging; spot, forwards, swaps, and options (on a case-by-case basis)YesYesMonthly level of foreign reserves–AREAER, 2006

    –Central bank website

    –HSBC’s Guide to Emerging Market Currencies, 2008
    SwedenIndependently floating–Signal changes in monetary policyNeverDiscretionary interventionsDeveloped; spot, forwards swaps, and options, YesYesWeekly, including forward position with a three-month lag–AREAER, 2006

    –Central bank website
    South AfricaIndependently floating–Level of foreign exchange reservesRarelyDiscretionary interventionsEmerging; spot, forwards, swaps, and optionsYesYesMonthly level of foreign reserves, specification of changes, and forward position–BIS Paper No. 24 -AREAER, 2006

    –Central bank website

    –HSBC’s Guide to Emerging Market Currencies, 2008
    ThailandManaged floating–Excess volatility -Achieve economic policy targetsWeekly or moreDiscretionary interventionsEmerging; spot, forwards, swaps, and optionsYesYesWeekly data on foreign reserve position, including net forward position–BIS Paper No. 24 -AREAER, 2006

    –Central bank website

    –HSBC’s Guide to Emerging Market Currencies, 2008
    TurkeyIndependently floating–Accumulate foreign exchange reserves

    –Excess volatility
    Daily foreign exchange auctions and occasional discretionary interventions (most recent discretionary intervention was in June 2006)–Preannounced foreign exchange auctions

    –Occasional discretionary interventions
    Emerging; spot, forwards, swaps, and optionsYesYes–Weekly data on international reserves

    –Daily data on foreign exchange auction amounts and interventions

    –Data on discretionary foreign exchange interventions available with a three

    –month lag

    –Schedule of foreign exchange buying auctions/optional selling and any changes resulting from market conditions
    –AREAER, 2006

    –Central bank website

    –HSBC’s Guide to Emerging Market Currencies, 2008
    United KingdomIndependently floatingN/ANeverDiscretionary interventionsDeveloped; spot, forwards, and optionsYesYesMonthly level of foreign reserves–AREAER, 2006

    –Central bank website
    Table A1.2.Intervention Practices of Emerging Economies with Other Anchors, Late 2007

    Rate Regime



    Frequency of


    Level of





    AlgeriaManaged floating with no predetermined path for the exchange rateN/AN/AN/ACentral bank is the main buyer and seller in the foreign exchange market.N/ANoNo– 2006 IMF Staff Report
    AngolaManaged floating with no predetermined pathN/AWeekly or moreN/AShallow; N/ANot automaticallyNoNo–AREAER, 2006
    ArgentinaManaged floating with no predetermined path–Excess volatility

    –Level of foreign reserves
    Weekly or moreDiscretionary interventionsEmerging; spot, non-deliverable forwards, and nondeliverable options (on a case-by-case basis) Note: Most commonly traded offshore as a nondeliverable forwardMonetization according to the monetary programYes–Daily press release stating intervention and its size

    –Weekly Exchange Report
    –AREAER, 2006

    –BIS Paper No. 24

    –Central bank website -HSBC’s Guide to Emerging Market Currencies, 2008
    AzerbaijanConventional fixed peg against a single currency–Excess volatility


    –Financial stability
    Weekly or moreThrough the interbank electronic trading systemShallow; spot and (less liquid) forward market Note: The central bank is an active participant in clearing supply-and-demand imbalancesCentral bank achieves only partial sterilizationNo–Accumulated intervention data released in reports “on the situation of monetary policy implementation…” at certain intervals during the year

    –Level of foreign exchange reserves

    –IMF Staff Visit Concluding Statement, September 6, 2006
    –AREAER, 2006

    –Central bank website
    Costa RicaCrawling pegAs necessary to maintain the crawling pegN/AThrough the organized electronic foreign exchange market (MONED)Shallow; spotCentral bank achieves only partial sterilizationYesDaily exchange rates of intervention sales and purchases (not volume)– 2006 IMF Staff Report -AREAER, 2006

    – Central bank website
    CroatiaManaged floating with no predetermined pathExchange rate stabilityOccasionallyForeign exchange auctionsEmerging; spot, forwards, and optionsN/AYesDaily; intervention volume and average exchange rate–2006 IMF Staff Report -AREAER, 2006

    – Central bank website

    – HSBC’s Guide to Emerging Market Currencies, 2008
    Dominican RepublicManaged floating with no predetermined path–Maintain price stability -Adequate level of foreign reservesGradually accumulating reservesN/AShallow; spot (traded on electronic trading platform)YesNoMonthly level of reserves– 2007 IMF Program Letter of Intent

    –AREAER, 2006

    – Central bank website
    GuatemalaManaged floating with no predetermined pathModerate exchange rate volatilityN/AN/AShallow; Bolsa de Valores Nacional, S.A., is responsible for the operation and administration of the forward exchange marketN/ANoN/A–AREAER, 2006

    – Central bank website
    IranCrawling pegMaintain the value of the currency and equilibrium in the balance of payments, to facilitate trade transactions and assist economic growthN/AN/AShallow; no forward foreign exchange marketN/ANoN/A–AREAER, 2006

    – Central bank website
    KazakhstanManaged floating with no predetermined pathManage short-term and speculative exchange rate fluctuationsN/AN/AShallow; spot, forwards, and futures Note: Electronic trading on stock exchange (KASE) as well as over the counter. Foreign exchange futures are quoted on the KASEPartial sterilizationYes–Monthly data (forward and future positions in foreign currencies)–2006 IMF Staff Report -AREAER, 2006

    – Central bank website
    MalaysiaManaged floating with no predetermined pathSmooth excess volatilityN/AN/AEmerging; spot, forwards, swaps, and options Note:The Malaysian ringgit is not convertible outside MalaysiaN/AYesMonthly data on reserves–IMF Public Information Notice No. 07/34

    –AREAER, 2006

    –Central bank website

    –Deutsche Bank Asian Currency Handbook 2006

    – HSBC’s Guide to Emerging Market Currencies, 2008
    RomaniaManaged floating with no predetermined pathExcess volatilityN/AN/AShallow; spot Note: Ongoing development of forward marketPartial sterilizationYesMonthly data on reserves–AREAER, 2006

    –Central bank website
    RussiaManaged floating with no predetermined pathPrevent excessive ruble appreciation and avert sharp exchange rate fluctuations that are not a result of fundamental economic factorsWeeklyOn the currency exchange or the over-the-counter interbank marketEmerging; spot, forwards, swaps, nondeliverable futures, futures, and options Note: Options are mostly nondeliverable owing to a lack of Russian ruble money market liquidity. Ruble futures are traded on the Chicago Mercantile Exchange and the Moscow Interbank Currency ExchangeUnsterilizedYesWeekly level of international reserves– 2006 IMF Staff Report -AREAER, 2006

    – Central bank website

    – HSBC’s Guide to Emerging Market Currencies, 2008
    SerbiaManaged floating with no predetermined pathPrevent excessive daily exchange rate fluctuations, threats to financial and price stability, and risk to the adequacy of the level of foreign exchange reservesWeekly or more–Ad hoc fixing sessions or discretionary interventions

    – Daily rechanneling of foreign exchange purchased from licensed exchange dealers to commercial banks
    Shallow; spot, and (small-scale) forward marketN/ANo– Monthly publication of foreign exchange reserves specifying the amount of foreign exchange transactions of the central bank -Technical assistance reports– AREAER, 2006

    – Central bank website
    Sri LankaManaged floating with no predetermined path– Excess volatility

    – Meet targets for official international reserve
    N/AN/ASpot, forwards permitted per regulations, options on a case-by-case basis Note: The Sri Lanka rupee is nondeliverable and not fully convertible on the capital accountThe 2006 IMF Staff Report notes that authorities “intend to step up open market operations to reduce excess liquidity in the banking system.”NoNo– 2006 IMF Staff Report -AREAER, 2006

    – Central bank website
    TunisiaManaged floating with no predetermined pathAccording to the “real effective exchange rate rule"N/ADiscretionary interventionsShallow; spot, forwards (highly regulated)Partial sterilizationYes– Breakdown of its own transactions, annually and cumulative amount during the current year

    – Level of foreign exchange reserves on a monthly basis
    – 2006 IMF Staff Report -AREAER, 2006

    – Central bank website
    UruguayManaged floating with no predetermined path– Build up reserves

    – Slow down peso appreciation
    N/ADiscretionary interventionsEmerging; spot, forwards Note: Offshore, the Uruguayan peso is generally traded on a nondeliverable basis, deliverable forwards on a case-by-case basis. Locally, nondeliverable forwards and forwards are usually traded on a case-by-case basisN/AYes–Weekly publication of reserves - 2006 Staff Report–AREAER 2006

    – Central bank website

    – HSBC’s Guide to Emerging Market Currencies, 2008
    Appendix II The Small Open-Economy Model

    The first part of this appendix describes the structure and calibration of the Small Open-Economy Model used in the analysis of alternative monetary policy frameworks. The second part reviews existing model-based analyses of hybrid inflation-targeting rules, and the third part describes the simulation methodology.

    Model Structure

    The model used in this paper to analyze alternative monetary policy rules is a fairly conventional New Keynesian open-economy model. These models embody a synthesis of the modeling approach of the real business cycle literature and micro foundations for Keynesian concepts.110 Such models have essentially neoclassical long-run characteristics—notably including monetary neutrality—but have Keynesian short-term characteristics which provide scope for monetary policy to affect the real economy over the short to medium term. However, such models are mostly founded on explicit micro foundations, making the underlying assumptions of the model more transparent and making them less vulnerable to the Lucas critique than more ad hoc reduced-form specifications.

    The model used in this paper is deliberately conventional in the sense of drawing on standard micro foundations to derive the main behavioral equations. An important feature of the model is that it abstracts from the determination of the steady state of the economy as well as from permanent shocks that change the steady state. Inflation targeting focuses on the dynamics of the return to the steady state following macroeconomic disturbances.

    The model includes several features that attempt to capture some characteristics of financially vulnerable emerging economies. These include:

    • Credit constraints limiting the degree of intertemporal arbitrage in consumption (following Amato and Laubach, 2003; and Galí, López-Salido, and Vallés, 2007), to reflect the relatively undeveloped domestic financial systems in many emerging economies; this is a procyclical component of aggregate demand, which is insensitive to the interest rate and has the potential to increase the reaction required of the central bank, introducing more volatility to exchange rates.

    • An endogenous risk premium (following Céspedes, Chang, and Velasco, 2004), increasing in external indebtedness and the exchange rate.

    • Allowance for perverse exchange rate effects on income (following Morón and Winkelried, 2005) to reflect adverse balance-sheet effects.

    • Allowance for different timing of exchange rate pass-through to costs and prices (Monacelli, 2004).

    • Inclusion of an exported natural resource, providing scope for terms of trade shocks.

    • Allowance to explicitly include movements in the exchange rate in the central bank policy reaction function (Cavoli and Rajan, 2006; and Kirsanova, Campbell, and Wren-Lewis, 2006).

    • Allowance to reflect weak policy credibility in more backward-looking inflation expectations and price formation (Erceg, Henderson, and Levin, 2000; and Argov and others, 2007).

    The log-linearized equations included in the model are as follows:111

    Aggregate Spending

    Aggregate spending on the domestically produced good, y^td, is composed of domestic spending, c^t, plus exports, x^td:


    c¯/y¯dandx¯/y¯d represent the respective shares of consumption and expoirts in domestic output in the steady state.

    A fraction, λ of domestic spending is by optimizing (Ricardian) consumers, c^t0, and the rest is by “rule-of-thumb” (non-Ricardian) consumers, c^tr:

    Spending by optimizing Ricardian consumers is derived from a standard separable utility function on consumption, Ct, and labor, Nt:


    σ is the coefficient of relative risk aversion

    γ is the degree of habit formation in consumption.

    This introduces an element of inertia into consumption, and is a fairly standard feature of New Keynesia models.

    The first-order conditions of utility maximization provide the Euler equation that guides consumption:


    i^t is the current nominal interest rate

    π^t+1 is the inflation rate expected in period t+1.

    Rule-of-thumb or non-Ricardian consumers do not smooth consumption through borrowing and lending. The lack of consumption smoothing may reflect limited access of some households to financial markets.112 As a consequence, for these consumers, spending is based on current income:


    ŵt is the nominal wage rate per unit of work a supplied

    P^t is the price level

    n^t is the number of units of work supplied.

    In addition to domestic demand, there is also foreign demand for the domestically produced good, x^td. Export demand depends on foreign real income and the real exchange rate:


    y^t*is foreign real income

    q^t is the real exchange rate (the real cost of foreign currency)

    ρxd is the degree of persistence in domestically-produced exports

    τ is the exchange rate elasticity of demand for domestically-produced exports.

    Aggregate Production

    Output in the economy consists of two types of goods. One is a composite good produced by monopolistically competitive firms using labor and imported goods as inputs. This good is both consumed domestically and exported. The second is a natural endowment commodity which is exported.

    The composite good is produced using a CES production technology with inputs of labor and an imported input. This production function is particularly convenient because of its generality, given that it embeds a Cobb-Douglas or even a Leontief technology, depending on the size of the elasticity of input substitution chosen:


    σs is the elasticity of substitution in production

    It is the imported intermediate input

    Nt is the labor input

    α is the share of the imported good in production—the openness of the economy

    At is total factor productivity.

    Production costs reflect the costs of the labor and the imported inputs, as well as labor. The real cost of imported inputs is determined by the real exchange rate, q^t, while the real wage, (w^tp^t), is determined by the equilibration of producers’ demand for labor, n^t, with the supply of labor by households. The supply of labor is derived from maximization of utility in Equation (3)113 by both types of consumers. Aggregate supply depends positively on real wage and negatively on consumption. This is a typical result obtained from the first order condition with respect to labor of separable utility functions:


    v is the coefficient of disutility of labor.

    With the production technology specified in Equation (7), the real marginal cost of production, m^crR, is given by:


    ŵt is the nominal wage rate per unit of work supplied

    p^t is the price level q^t is the real exchange rate (the real cost of foreign currency)

    α^t is the (log) deviation of At from its steady state value.

    Equation (9) shows that the more open the economy, the larger the impact of exchange rate movements on production costs and inflation. The elasticity of substitution in production also plays an important role: the lower the possibility of substituting domestic labor for imported inputs, the larger the impact of an exchange rate movement on costs.

    Production of the second endowment type good, x^tCM, is essentially exogenous and is completely exported. The amount produced of this commodity does not react to its price, and the requirement of local inputs to its production is negligible. Its value depends on the real exchange rate and its price, p¯tCM, abroad, which is given by international markets. Consequently, the value of production is determined as:

    Firms set the price of output for the domestic market in one of two ways. One group of firms, accounting for a fraction, μ of sales of the domestic good, follows a simple, backward-looking approach to adjusting their prices.114 In effect, this leads to an element of indexation of prices, generating persistence in inflation. Another group of price-setters takes a forward-looking optimization approach to price setting but only adjust their prices periodically, à la Calvo. In any given period, it is assumed that only a fraction, (1-8), of the optimizing firms adjust their prices. The backward-looking component of price setting can be motivated by uncertainty regarding the central bank’s inflation objective (Erceg, Henderson, and Levin, 2000) or limited credibility of the policy framework (Argov and others, 2007). In both cases, agents will tend to place a greater weight on recent inflation outcomes in forming inflation expectations than otherwise.

    Taking these considerations into account, the aggregate inflation rate in the economy will be summarized by a New Keynesian Phillips curve of the form:


    β is the subjective rate of time preference

    μ is the proportion of price adjustment based on a simple indexation formula, φ=1θθ(1βθ), where (1-θ) is the average frequency of price adjustment by optimizing firms

    m^crR is the real marginal cost of production.

    This Phillips curve has three elements. The first is an expected inflation component. This reflects the assumption that firms adjust their prices periodically rather than continuously, so that when prices are adjusted, firms take into account the expected evolution of inflation. The second term is a lagged inflation component reflecting the indexation applied to a fraction, μ of prices. The third term reflects the incorporation of marginal costs into optimizing firms’ prices. Exchange rate movements feed into inflation through their impact on marginal costs. The speed of pass-through into inflation depends both on the proportion of optimizing firms and on the average frequency of price adjustments.

    Exchange Rate Determination

    The real exchange rate is assumed to be determined by the real uncovered interest parity condition, together with a risk premium:


    q^t=s^t+p^t*p^t is the real exchange rate t is the spot price of foreign exchange and p^t* is the foreign price level)

    i^t*is the foreign nominal interest rate

    π^t+1* is the expected foreign inflation rate

    φ^t is the risk premium.

    Following Céspedes, Chang, and Velasco (2004), the risk premium, φ^t , depends on debt, the exchange rate, and GDP:115


    • (b^t+1*y^t) is the projected external debt-to-GDP ratio.

    • The risk premium consists of four elements:

    • The first term in the equation, φ0(b^t+1*y^t), says that the risk premium is an increasing function of the ratio of external debt to GDP. This friction in the international capital markets is required to ensure stationarity of the external debt-to-GDP ratio.116

    • The second and third terms, φ1(x¯dx¯d+x¯cmx¯td+(x¯cmx¯d+x¯cm1)q^t)+φ1(I^t), relate the risk premium negatively to exports and positively to imports, so that a weakening of the current account raises the risk premium.

    • The last term, φ3(q^t), captures the adverse impact of currency depreciation on the domestic currency value of external debt—the balance sheet effect. As the debt service burden on borrowers rises, the risk premium increases. For a financially vulnerable economy, the adverse impact of depreciation through the balance sheet effect must outweigh the beneficial effects of depreciation on the current account so that depreciation has a net harmful effect on activity. This imposes restrictions on the values of the parameters in the risk premium equation.117

    Monetary Policy

    Monetary policy is described by the alternative reaction functions presented in the main text.

    Equilibrium Identities

    Total output of the economy is the sum of the domestic consumption and exports of the domestically produced good, together with the exports of the exported endowment commodity:


    c¯/y¯,x¯d/y¯,andx¯CM/y¯ are shares of consumption, exports of domestically produced goods, and exports of the endowment commodity in total production.

    The balance of payments or economy-wide constraint is built adding up the consumer, government, and firm resource constraints:

    The net change in foreign debt should be equal to the current account, which is composed of the trade balance and interest payments abroad.

    Model Calibration

    Differences in the calibration of the financially robust advanced and the financially vulnerable emerging economies are shown in Table A2.1 and reflect the following considerations:

    • Domestic financial development. In the emerging economy, the share of “rule-of-thumb spending” based on current income is set at 30 percent, compared to 0 percent in the advanced economy, to reflect limited access of agents to borrowing opportunities and greater use of quantitative credit rationing rather than use of retail interest rates. Better access to borrowing and saving opportunities in advanced economies is also reflected in higher persistence in spending behavior, with the persistence coefficient set at 0.5 versus 0.3 in emerging economies.

    • External financial constraints. More limited capital mobility and international asset substitutability in vulnerable emerging economies is reflected in: (1) a risk premium with a substantially higher coefficient related to the level of the external debt-to-GDP ratio (0.05 compared to 0.01 for the advanced economy (based on Schmidt-Grohé and Uribe, 2003)); and (2) a higher coefficient on the current account balance (0.3 compared to 0.2 for the advanced economy).118 In addition, the balance sheet vulnerability of the emerging economy is reflected in a much higher elasticity of the risk premium with respect to exchange rate movements than in the advanced economy (0.5 compared to 0.05).

    Table A2.1.Parameter Calibration of the Advanced and Emerging Economy Models
    Advanced EconomyEmerging Economy
    Utility function
    Subjective Discount rateβ = 0.988β = 0.988
    Coefficient of relative risk aversionσ= 1σ= 2
    Parameter of the labor supply (disutility)ν = 2ν = 2
    Habit coefficientγ= 0.5γ= 0.3
    Share of rule-of-thumb consumersλ = oλ = 0.3
    Production function
    Factor (input) elasticity of substitution in production functionσs=1σs=1
    Weight of imported factor (degree of openness)α=0.25α=0.3
    Elasticity of home exports to exchange rateτ= 5τ= 5
    Elasticity of commodity exports to exchange rate00
    Probability of not reoptimizingθ = 0.75θ = 0.75
    Degree of indexation (for firms that are not reoptimizing)μ = 0μ = 0.8
    Elasticity of demandε= 6ε= 6
    Mark-up[ε/(ε-1)] = 1.2[ε/(ε-1)] = 1.2
    Rigid wages (Dummy_WR)D_WR = 0D_WR =0
    Parity condition and risk premium
    Elasticity of country risk premium to foreign debt0.010.05
    Elasticity of country risk premium to exports0.200.3
    Elasticity of country risk premium to imports0.200.3
    Elasticity of risk premium to real exchange rate (balance sheet)0.050.5
    Exchange rate smoothing0.60.6
    Monetary Policy
    Interest rate smoothing in Taylor rule0.70.7
    Parameter related to inflation gap0.25 ≤ coeff. ≤ 3.110.26 ≤ coeff. ≤ 3.15
    Parameter related to output gap–0.28 ≤ coeff. ≤ 2.57–0.28 ≤ coeff. ≤ 2.61
    Parameter related to exchange rate0.60.6
    Shock Inertia
    Shock persistenceRho_R=0.8Rho_R=0.8

    A crucial implication of these parameter configurations is that currency depreciation in the financially robust advanced economy will be expansionary as the stimulus to net exports will outweigh any adverse balance sheet effects. In contrast, currency depreciation has a net contractionary effect in the vulnerable emerging economy as the stimulus to net exports is more than offset by the adverse impact on balance sheets and, consequently, on consumption and investment.

    • Openness. The share of imports in production rather than GDP (following McCallum, 2006) is set at 25 percent for the advanced economy and at 30 percent for the emerging economy, consistent with international evidence.

    • Policy credibility. In the robust advanced economy, price formation is based on a purely forward-looking approach to formation inflation expectations (μ= 0). Implicitly, this assumes that agents know and believe the central bank’s policy rule. In the emerging economy, price formation is assumed to be much more backward looking (μ = 0.8), reflecting limited credibility of the central bank’s commitment to an inflation objective (following Rudebusch and Svensson, 1998; Erceg, Henderson, and Levin, 2000; and Argov and others, 2007).

    Evidence on the Performance of Alternative Frameworks

    This section reports the performance of alternative hybrid monetary policy rules in financially robust advanced and financially vulnerable emerging economies. It reviews existing model-based analyses of hybrid rules and then discusses the simulations and findings using the model described above.

    Existing Studies of Hybrid Policy Rules

    Taylor (2001) reviews the limited number of studies that had looked at the issue of whether it would be appropriate to take the exchange rate explicitly into account in monetary policy in an open economy.119 He concludes there was little evidence that including a systematic response to exchange rate movements would improve macroeconomic performance, even in an open economy. He attributes this to two principal factors: (1) even in the plain vanilla framework, monetary policy already responds to the indirect impact of exchange rate movements on output and inflation, and (2) the appropriate response to exchange rate movements should depend on the cause of the movement. He suggests that adding a mechanistic response to exchange rate movements in the policy reaction function could worsen performance, depending on the typical array of shocks affecting the economy. Both Taylor (2000) and Mishkin (2000), however, recognize that more research is needed in this area before any strong conclusions can be drawn.

    More recent research has begun to examine whether differences in economic and financial structure between emerging and more advanced economies may explain the “fear of floating” evident in many emerging and developing economies and may justify including systematic dampening of exchange rate movements in the central bank policy reaction function.120 Below is a brief summary of some of the main findings for each of the hybrid inflation-targeting exchange rate frameworks.

    Open-Economy Inflation Targeting

    Model-based analyses generally find little benefit from including the exchange rate in the monetary policy reaction function. Indeed, several studies argue that including the exchange rate worsens macroeconomic performance. However, in some other studies, including the exchange rate in the reaction function is found to be beneficial if the economy is financially fragile or if the central bank is very uncertain of how the exchange rate is determined:

    • Céspedes, Chang, and Velasco (2004) consider the impact of exchange rate movements in economies with a high degree of dollarization and constrained access to international borrowing opportunities. In such circumstances, exchange rate movements can give rise to strong balance sheet effects opposite to the normal competitiveness effects of exchange rate movements. Which effect dominates depends on each country’s situation. However, the authors find that exchange rate flexibility outperforms a fixed exchange rate regime.

    • Morón and Winkelried (2005) compare optimal hybrid reaction functions in financially vulnerable and financially robust economies. In general, the optimized rules for a vulnerable economy place much less weight on smoothing output and more weight on dampening exchange rates than in a robust economy. The analysis does not directly compare the performance of such hybrid rules against otherwise similar rules excluding exchange rate terms. Nonetheless, the finding that some exchange rate smoothing is involved in the optimal rules appears to imply that rules excluding exchange rate smoothing perform less well in minimizing inflation or output volatility or both. It is not clear, however, why some exchange rate smoothing appears optimal for both the vulnerable and robust economies.

    • Cavoli and Rajan (2006) compare variations on plain vanilla and hybrid Taylor rules for a financially vulnerable economy (calibrated to the Thai economy). Key results of interest are that: (1) in optimally weighted, open-economy Taylor rules (including an exchange rate term), the optimal weight on the exchange rate is low; (2) open-economy Taylor rules may well lead to greater macroeconomic volatility than plain vanilla Taylor rules; and (3) the emphasis put on the level of the real exchange rate versus changes in the exchange rate has important consequences for macroeconomic outcomes. It is not clear, however, whether these results would carry over to a model with more forward-looking behavior, including more forward-looking policy formulation.

    • Batini, Levine, and Pearlman (2007), using a calibrated model of the Peruvian economy with dollarization and financial “frictions,” compare fixed and flexible exchange rate regimes. They find that a fixed exchange rate delivers much poorer performance. They conclude that, because dollarization weakens the output gap channel of transmission relative to the exchange rate channel, nothing should be done to limit the flexibility of the exchange rate in order to achieve the inflation target.

    • Ravenna and Natalucci (2008) use a model loosely calibrated to the transition economies of Eastern Europe to examine the implications of the Balassa-Samuelson effect. They find that when the economy is experiencing a prolonged period of more rapid productivity growth in the tradables than in the non-tradables sector, macroeconomic performance is much better with a flexible exchange rate than with a rule involving a high degree of exchange rate management.

    • Leitemo and Söderstöm (2005) and Wollmershäuser (2006) both consider the performance of alternative policy rules when there is uncertainty surrounding the determination of the exchange rate. Although not specifically an emerging economy issue, uncertainty about the determination of the exchange rate may be even greater in such economies than in more advanced economies. The authors of both papers find a small gain from including the exchange rate in the reaction function when there is no uncertainty about exchange rate determination. However, when uncertainties are introduced, Leitemo and Söderstöm find that a Taylor rule is slightly more robust than an open-economy rule, while Wollmershäuser finds that open-economy rules are more robust to a wider range of exchange rate uncertainties.

    Table A2.2.Reaction Function Coefficients

    Inflation Targeting with an Exchange Rate Band

    It is unclear how well this type of framework compares with a more conventional inflation-targeting framework in terms of macroeconomic performance:

    • Lahiri and Végh (2001) suggest that an exchange rate band may be appropriate if nominal exchange rate movements and higher interest rates have output costs and if intervention is costly. In such circumstances, a fairly free float within an exchange rate band may be optimal, at least in response to some kinds of shocks.

    • Morón and Winkelried (2005) examine such a policy in their model of a financially vulnerable economy and find that it tends to outperform a policy involving a more linear response to exchange rate movements. The authors note, however, that the analysis fails to take into account the impact that limiting exchange rate movements will have on the behavior of economic agents. In particular, if the central bank limits the range of exchange rate movement, this could encourage agents to increase their foreign currency liabilities, accentuating the vulnerability of the economy. This would make the economy particularly vulnerable to real shocks shifting the equilibrium real exchange rate.

    Exchange-Rate-Based Inflation Targeting

    McCallum (2006) compares the performances of plain vanilla and exchange-rate-based approaches to inflation targeting in an economy with varying degrees of openness. The first key finding is that, as the degree of openness increases, an exchange-rate-based approach to inflation targeting does much better than the standard interest-rate-based approach in stabilizing output, with no adverse consequences for inflation variability. The second key finding is that, in the interest-rate-based approach, the variability of the interest rate is low while that of the exchange rate is high, whereas in the exchange rate-based approach, the opposite occurs. These results suggest, broadly, that in a very open economy, smoothing the exchange rate rather than interest rates may contribute to reducing output volatility.

    Simulation Method

    Construction of Volatility Tradeoff Frontiers

    The volatility trade-off frontiers shown in the main text are constructed as follows:

    • For each of the two types of country models, 10 variants of each alternative policy reaction function were constructed, each with a slightly different weighting on the inflation and output objectives, as shown in Table A2.2. The sum of the coefficients on the two objectives was held constant, as were the coefficients on the exchange rate objective and the lagged instrument term.

    • Each country model, with each variation of the parameterization of the alternative policy rules, is then simulated in response to each of three kinds of shocks: demand, cost-push, and risk premium shocks.

    • Each simulation involves a 200-period run. In each period, the model is subjected to a shock drawn from a normal distribution.121 For each kind of shock, the 200-period simulation is replicated 50 times.122

    • These simulations provide 50 time series with 200 observations for each kind of shock, each policy rule variant, and each of the 29 endogenous variables. Of these, the variables of most interest are inflation, output, the interest rate, the exchange rate, and the current account balance. The standard deviation of the time series for each variable is then computed, between the 100th and 120th observation, and then averaged over each of the 50 replications to produce a representative standard deviation for each variable in response to each kind of shock and policy variant.123

    The same kind of simulation exercises could be carried out for variations of the weight of the exchange rate objective as opposed to the output, inflation, or instrument-smoothing objective. In this analysis, however, inflation and output smoothing are considered to be the ultimate objectives of monetary policy, whereas smoothing of the policy instrument or an exchange rate objective is to be evaluated in terms of their performance in achieving the foremost policy objectives.


      Agénor, Pierre-Richard, C. JohnMcDermott, and Eswar S.Prasad, 1999, “Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts,”IMF Working Paper 99/35 (Washington: International Monetary Fund).

      Aghion, Phillipe, PhillipeBacchetta, RomainRanciere, and KennethRogoff, 2007, “Exchange Rate Volatility and Productivity Growth: The Role of Financial Development,”Open Economies Review,Vol. 18, No. 2, pp. 191214.

      Aizenman, Joshua, MichaelHutchison, and IlanNoy, 2008, “Inflation Targeting and Real Exchange Rates in Emerging Markets,”NBER Working Paper No. 14561 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Allen, Mark, ChristophRosenberg, ChristianKeller, BradSetser, and NourielRoubini, 2002, “A Balance Sheet Approach to Financial Crisis,”IMF Working Paper 02/210 (Washington: International Monetary Fund).

      Amato, Jeffrey D., and ThomasLaubach, 2003, “Rule-of-Thumb Behaviour and Monetary Policy,”European Economic Review,Vol. 47 (October), pp. 791831.

      Archer, David, 2005. “Foreign Exchange Market Intervention: Methods and Tactics,” in Foreign Exchange Market Intervention in Emerging Markets: Motives, Techniques and Implications, BIS Papers No. 24 (Basel: Bank for International Settlements). Available at

      Argov, Eyal, BinyaminiAlon, ElkayamDavid, and RozenshtromIrit, 2007, A Small Macroeconomic Model to Support Inflation Targeting In Israel, Bank of Israel Research Paper (Jerusalem: Bank of Israel).

      AzañeroSaona, and JoséManuel, 2003, “Dinámica del tipo de cambio: una aproximación desde la teoría de la micro estructura del mercado,” Revistas Estudios Económicos,No. 9 (Lima: Central Reserve Bank of Perú).

      Ball, Laurence, 1999, “Policy Rules for Open Economies,” in Monetary Policy Rules,ed. by John B.Taylor (Chicago: University of Chicago Press), pp. 12744.

      Batini, Nicoletta, RichardHarrison, and StephenMillard, 2001, “Monetary Policy Rules for an Open Economy,”Bank of England Working Paper No. 149 (London: Bank of England).

      Batini, Nicoletta, KevinKuttner, and DouglasLaxton, 2005, “Does Inflation Targeting Work in Emerging Markets?”Chapter 4 of World Economic Outlook (Washington: International Monetary Fund, September).

      Batini, Nicoletta, PaulLevine, and JosephPearlman, 2007, “Monetary Rules in Emerging Economies with Financial Market Imperfections,”paper presented to at the NBER Conference on International Dimensions of Monetary Policy, S’Agaró, Catalonia, Spain, June 11–13, 2007.

      Blanchard, Olivier, 2005, “Fiscal Dominance and Inflation Targeting: Lessons from Brazil,”in Inflation Targeting, Debt, and the Brazilian Experience, 1999 to 2003,ed. by G. Giavazzi, I. Goldfajn, and S.Herrera (Cambridge, Massachusetts: MIT Press), pp. 4980.

      Brook, Anne-Marie, 2001, “The Role of the Exchange Rate in New Zealand’s Inflation Targeting Regime,”paper presented at the Fourteenth Pacific Basin Central Bank Conference, Seoul, November 15–18.

      Calvo, Guillermo, 2005, Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy? (Cambridge, Massachusetts: MIT Press).

      Calvo, Guillermo, and Carmen M.Reinhart, 2002, “Fear of Floating,”Quarterly Journal of Economics,Vol. 117 (May), pp. 379408.

      Camilleri, Marie Thérèse, ObertNyawata, and MarkStone, 2005, “Selected Country Experience in Implementing the Code of Good Practices on Transparency in Monetary and Financial Policies” (unpublished; Washington: International Monetary Fund).

      Canales-Kriljenko, Jorge Iván, Roberto F.Guimaraes, and CemKaracadag, 2003, “Official Intervention in the Foreign Exchange Market: Elements of Best Practice,”IMF Working Paper No. 03/152 (Washington: International Monetary Fund).

      Carare, Aline, AndreaSchaechter, Mark R.Stone, and MarcZelmer, 2002, “Establishing Initial Conditions in Support of Inflation Targeting,”IMF Working Papers 02/102 (Washington: International Monetary Fund).

      Carson, Carol, CharlesEnoch, and ClaudiaDziobek, eds., 2002, Statistical Implications of Inflation Targeting: Getting the Right Numbers and Getting the Numbers Right (Washington: International Monetary Fund).

      Cavoli, Tony, 2006, “Fear of Floating and Optimal Monetary Policy: with Particular Reference to East Asia” (unpublished; Brisbane, Australia: Queensland University of Technology).

      Cavoli, Tony, and RamikishenRajan, 2006, “Monetary Policy Rules for Small and Open Developing Economies: A Counterfactual Policy Analysis,”Journal of Economic Development,Vol. 31 (June), pp. 89111.

      Central Bank of Chile, 2000, “Policy Rules and External Shocks,”Central Bank of Chile Working Paper No. 82 (Santiago: Central Bank of Chile).

      Céspedes, Luis, RobertoChang, and AndresVelasco, 2003, “IS-LM-BP in the Pampas,”IMF Staff Papers,Vol. 50 (special issue), pp. 14356.

      Céspedes, Luis, RobertoChang, and AndresVelasco, 2004, “Balance Sheets and Exchange Rate Policy,”American Economic Review,Vol. 94 (September), pp. 118393.

      Céspedes, Luis, and ClaudioSoto, 2005, “Credibility and Inflation Targeting in an Emerging Market: Lessons from the Chilean Experience,”International Finance,Vol. 8 (December), pp. 54575.

      Chinn, Menzie, and HiroIto, 2007, “Price-Based Measurement of Financial Globalization: A Cross-Country Study of Interest Rate Parity,”Pacific Economic Review,Vol. 12 (October), pp. 41944.

      Chiu, Priscilla, 2003, “Transparency versus Constructive Ambiguity in Foreign Exchange Intervention,”BIS Working Paper No. 144 (Basel: Bank for International Settlements).

      Choudhri, Ehasn U., and Dalia S.Hakura, 2001, “Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?”IMF Working Paper 01/194 (Washington: International Monetary Fund).

      Clarida, Richard H., 2001, “The Empirics of Monetary Policy Rules In Open Economies,”International Journal of Finance and Economics,Vol. 6, No. 4 (October), pp. 31523.

      Clarida, Richard, JordiGalí, and MarkGertler, 1999, “The Science of Monetary Policy,”Journal of Economic Literature,Vol. 37 (December), pp. 1661707.

      Clark, Peter, NataliaTamirisa, Shang-JinWei, A.Sadikov, and L.Zeng, 2004, A New Look at Exchange Rate Volatility and Trade Flows, IMF Occasional Paper No. 235 (Washington: International Monetary Fund).

      De Gregorio, José, and AndreaTokman, 2005, “Flexible Exchange Rate Regime and Forex Intervention,” in Foreign Exchange Market Intervention in Emerging Markets: Motives, Techniques and Implications, BIS Papers No. 24 (Basel: Bank for International Settlements). Available at

      Disyatat, Piti, and GabrieleGalati, 2005, “The Effectiveness of Foreign Exchange Intervention in Emerging Market Countries,”BIS Working Paper No. 172 (Basel: Bank for International Settlements).

      Domac, Ilker, and AlfonsoMendoza, 2002, “Is there Room for Forex Interventions under Inflation Targeting Framework? Evidence from Mexico and Turkey” (Ankara: The Central Bank of the Republic of Turkey).

      Dominguez, Kathryn, and JeffreyFrankel, 1993, Does Foreign Exchange Intervention Work? (Washington: Institute for International Economics).

      Drew, Aaron, and BenjaminHunt, 2000, “Efficient Simple Policy Rules and the Implications of Potential Output Uncertainty,”Journal of Economics and Business,Vol. 52, Nos. 1–2, pp. 14360.

      Duttagupta, Rupa, GildaFernandez, and CemKaracadag, 2004, “From Fixed to Float: Operational Aspects of Moving Towards Exchange Rate Flexibility,”IMF Working Paper 04/126 (Washington: International Monetary Fund).

      Edison, Hali, 1993, “The Effectiveness of Central-Bank Intervention: A Survey of the Literature after 1982,” Princeton University Special Papers in International Economics No. 18 (Princeton, New Jersey: Princeton University).

      Edison, Hali, PaulCashin, and HongLiang, 2006, “Foreign Exchange Intervention and the Australian Dollar: Has It Mattered?”International Journal of Finance and Economics,Vol. 11 (April), pp. 15571.

      Edison, Hali, RobertoGuimarães-Filho, CharlesKramer, and JacquesMiniane, 2007, “Sterilized Intervention in Emerging Asia: Is It Effective?” Regional Economic Outlook: Asia and Pacific, IMF World Economic and Financial Surveys (Washington: International Monetary Fund, October).

      Edwards, Sebastian, 2006, “The Relationship Between Exchange Rates and Inflation Targeting Revisited,”NBER Working Paper No. 12163 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Ehrmann, Michael, and FrankSmets, 2003, “Uncertain Potential Output: Implications for Monetary Policy,”Journal of Economic Dynamics and Control,Vol. 27 (July), pp. 161138.

      Eichengreen, Barry, and RicardoHausmann, 1999, “Exchange Rates and Financial Fragility,”paper presented at the Annual Conference of the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26–28.

      Enoch, Charles, 1998, “Transparency in Central Bank Operations in the Foreign Exchange Market,”IMF Paper on Policy Analysis and Assessment No. 98/2 (Washington: International Monetary Fund).

      Enoch, Charles, and InciÖtker-Robe, eds., 2007, Rapid Credit Growth in Central and Eastern Europe: Endless Boom or Early Warning? (Washington: International Monetary Fund).

      Erceg, Christopher, DaleHenderson, and AndrewLevin, 2000, “Optimal Monetary Policy with Staggered Wage and Price Contracts,”Journal of Monetary Economics,Vol. 46 (October), pp. 218313.

      Evans, Martin D., and Richard K.Lyons, 2002, “Order Flow and Exchange Rate Dynamics,”Journal of Political Economy,Vol. 110, No. 1, pp. 17080.

      Ferhani, Hervé, MarkStone, AnnaNordstrom, and SeiichiShimizu, 2009, Developing Essential Financial Markets in Smaller Economies: Stylized Facts and Policy Options, IMF Occasional Paper No. 265 (Washington: International Monetary Fund).

      Frankel, Jeffrey, DavidParsley, and Shang-JinWei, 2005, “Slow Passthrough Around the World: A New Import for Developing Countries?”NBER Working Paper No. 11199 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Frömmel, Michael, and FranziskaSchobert, 2006, “Monetary Policy Rules in Central and Eastern Europe,”Liebniz Universität Hannover Economics Department Discussion Paper No. 341 (Hannover, Germany: Liebniz University Hannover).

      Gagnon, Joseph E., and JaneIhrig, 2004, “Monetary Policy and Exchange Rate Pass Through,”International Journal of Finance and Economics,Vol. 9, pp. 31538.

      Galati, Gabriele, and WilliamMelick, 2002, Central Bank Intervention and Market Expectations (Basel: Bank for International Settlements).

      Galí, Jordi, and MarkGertler, 2007, “Macroeconomic Modeling for Monetary Policy Evaluation,”NBER Working Paper No. 13542 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Galí, Jordi, DavidLópez-Salido, and JavierVallés, 2007, “Understanding the Effects of Government Spending on Consumption,”Journal of the European Economic Association,Vol. 5, No. 1, pp. 22770.

      Galí, Jordi, and TommasoMonacelli, 1999, “Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy,”Boston College Working Paper in Economics No. 438 (Boston: Boston College).

      Galí, Jordi, and TommasoMonacelli, 2005, “Monetary Policy and Exchange Rate Volatility in a Small Open Economy,”Review of Economic Studies,Vol. 72, No. 3, pp. 70734.

      Gertler, Mark, SimonGilchrist, and FabioNatalucci, 2003, “External Constraints on Monetary Policy and the Financial Accelerator,”NBER Working Paper 10128 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Goodfriend, Marvin, and Robert G.King, 1998, “The New Neoclassical Synthesis and the Role of Monetary Policy,”Working Paper 98-05 (Richmond, Virginia: Federal Reserve Bank of Richmond).

      Grimes, Arthur, and JasonWong, 1994, “The Role of the Exchange Rate in New Zealand Monetary Policy,”Exchange Rate Policy and Interdependence: Perspectives from the Pacific Basin,ed. by ReuvenGlick and MichaelHutchison (Cambridge, England: Cambridge University Press).

      Guimarães, Roberto Pereira, and CemKaracadag, 2004, “The Empirics of Foreign Exchange Intervention,”IMF Working Paper 04/123 (Washington: International Monetary Fund).

      Habermeier, Karl F., InciÖtker, LuisIgnacio Jácome, AlessandroGiustiniani, KotaroIshi, DavidVávra, TurgutKisinbay, and FranciscoF. Vázquez, 2009, “Inflation Pressures and Monetary Policy Options in Emerging and Developing Countries—A Cross Regional Perspective,”IMF Working Paper 09/1 (Washington: International Monetary Fund).

      Heenan, Geoffrey, MarcelPeter, and ScottRoger, 2006, “Elements of Inflation Targeting: Institutional Arrangements, Target Specification, and Communications,”IMF Working Paper 06/278 (Washington: International Monetary Fund).

      Helbling, Thomas, FlorenceJaumotte, and MartinSommer, 2006, “How Has Globalization Affected Inflation?”World Economic Outlook (Washington: International Monetary Fund, April).

      Ho, Corrinne, and RobertMcCauley, 2003, “Living with Flexible Exchange Rates: Issues and Recent Experience in Inflation Targeting Emerging Market Economies,”BIS Working Paper No. 130 (Basel: Bank for International Settlements).

      Honohan, Patrick, and AnqingShi, 2003, “Deposit Dollarization and the Financial Sector in Emerging Economies,”in Globalization and National Financial Systems,ed. by James A.Hanson, PatrickHonohan, and GiovanniMajnoni (New York: Oxford University Press).

      HSBC, 2008, HSBC’s Guide to Emerging Market Currencies 2008 (Hong Kong: Hong Kong and Shanghai Banking Corporation).

      Hung, Juann, 1997, “Intervention Strategies and Exchange Rate Volatility: A Noise Trading Perspective,”Journal of International Money and Finance,Vol. 16 (September), pp. 77993.

      Hutchison, Michael, and IlanNoy, 2005, “How Bad Are Twins? Output Costs of Currency and Banking Crises,”Journal of Money, Credit and Banking,Vol. 37, No. 4, pp. 72552.

      International Monetary Fund, 1999, Code of Good Practices on Transparency in Monetary and Financial Policies (Washington).

      International Monetary Fund, 2004, Colombia: Selected Issues, Country Report No. 06/401 (Washington).

      International Monetary Fund, 2006a, Republic of Serbia: Selected Issues, Country Report No. 06/382 (Washington).

      International Monetary Fund, 2006b, Turkey: Third and Fourth Reviews Under the Stand-By Arrangement and Request for Waiver of Performance Criteria—Staff Report; Staff Supplement, Press Release on the Executive Board Discussion; and Statement by the Executive Director for Turkey, Country Report No. 06/402 (Washington).

      International Monetary Fund, 2007a, Republic of Azerbaijan: 2007 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Azerbaijan, IMF Country Report No. 07/191 (Washington).

      International Monetary Fund, 2007b, Romania: 2007 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Romania, IMF Country Report No. 07/219 (Washington).

      International Monetary Fund, 2007c, Romania: Selected Issues, IMF Country Report No. 07/220 (Washington).

      Johnson, Simon, JonathanOstry, and ArvindSubramanian, 2007, “The Prospects for Sustained Growth in Africa: Benchmarking the Constraints,”NBER Working Paper No. 13120 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Johnston, R. Barry, Salim M.Darbar, and ClaudiaEcheverria, 1999, “Sequencing Capital Account Liberalization: Lessons from Chile, Indonesia, Korea, and Thailand,”in Sequencing Financial Sector Reforms: Country Experiences and Issues,ed. by R. BarryJohnston and VasudevanSundararajan (Washington: International Monetary Fund).

      Kamil, Herman, 2008, “Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia,”IMF Working Paper 08/88 (Washington: International Monetary Fund).

      Kaminsky, Graciela L., and Carmen M.Reinhart, 1999, “The Twin Crises: Causes of Banking and Balance-of-Payments Problems,”American Economic Review,Vol. 89 (June), pp. 473500.

      Kaminsky, Graciela L., and Carmen M.Reinhart, 2000, “On Crises, Contagion, and Confusion,”Journal of International Economics,Vol. 51, No. 1, pp. 14568.

      Khor, Hoe Ee, EdwardRobinson, and JasonLee, 2004, “Managed Floating and Intermediate Exchange Rate Systems: The Singapore Experience,” MAS Staff Paper No. 37 (Singapore: Monetary Authority of Singapore, February).

      Kirsanova, Tatiana, CampbellLeith, and SimonWren-Lewis, 2006, “Should Central Banks Target Consumer Prices or the Exchange Rate?”Economic Journal, Royal Economic Society, Vol. 116, No. 512, pp. F20831.

      Kokenyne, Annamaria, and RomainVeyrune, 2008, “Technical Note on Dedollarization” (unpublished; Washington: International Monetary Fund, July).

      Koren, Miklos, and AdamSzeidl, 2003, “Exchange Rate Uncertainty and Export Prices” (unpublished; Cambridge, Massachusetts: Harvard University).

      Kramer, Charles, Hélène KolianePoirson, and AnanthakrishnanPrasad, 2008, “Challenges to Monetary Policy from Financial Globalization: The Case of India,”IMF Working Paper No. 08/131 (Washington: International Monetary Fund).

      Lahiri, Amartya, and CarlosVégh, 2001, “Living with the Fear of Floating: An Optimal Policy Perspective,”NBER Working Paper No. 8391 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Lall, Subir, FlorenceJaumotte, ChrisPapageorgiou, and PetiaTopalova, 2007, “Globalization and Inequality,” World Economic Outlook (Washington: International Monetary Fund, October).

      Laxton, Douglas, and PaoloPesenti, 2003, “Monetary Rules for Small, Open, Emerging Economies,”Journal of Monetary Economics,Vol. 50 (July), pp. 110946.

      Laxton, Douglas, and AlasdairScott, 2000, “On Developing a Structured Forecasting and Policy Analysis System Designed to Support Inflation Forecast Targeting,” in Inflation Targeting Experiences: England, Finland, Poland, Mexico, Brazil, and Chile (Ankara: Central Bank of the Republic of Turkey), pp. 663.

      Leiderman, Leo, and GilBufman, 2000, “Inflation Targeting under a Crawling Band Exchange Rate Regime: Lessons from Israel,” in Inflation Targeting in Practice: Strategic and Operational Issues and Application to Emerging Market Economies,ed. by M.Blejer and others (Washington: International Monetary Fund), pp. 7079.

      Leiderman, Leo, RodolfoMaino, and EricParrado, 2006, “Inflation Targeting in Dollarized Economies,”IMF Working Paper 06/157 (Washington: International Monetary Fund).

      Leitemo, Kai, and UlfSöderstöm, 2005, “Simple Monetary Policy Rules and Exchange Rate Uncertainty,”Journal of International Money and Finance,Vol. 24, No. 3, pp. 481507.

      Levy-Yeyati, Eduardo, and FedericoSturzenegger, 2007, “Fear of Appreciation,”World Bank Policy Research Working Paper Series No. 4387 (Washington: World Bank, November).

      Mayes, David, and BrendanRiches, 1996, “The Effectiveness of Monetary Policy in New Zealand,”Reserve Bank of New Zealand Bulletin,Vol. 59, No. 1, pp. 520.

      McCallum, Bennett, 2006, “Singapore’s Exchange Rate-Centered Monetary Policy Regime and Its Relevance for China,” MAS Staff Paper No. 43 (Singapore: Monetary Authority of Singapore).

      Mishkin, Frederic, 2000, “Inflation Targeting for Emerging Market Countries,”American Economic Review,Vol. 90 (May), pp. 1059.

      Mishkin, Frederic, 2007, “Discussion—Batini, Levine, and Pearlman, ‘Monetary Policy Rules in a Partially Dollarized Small Open Economy with Financial Market Imperfections,’”presented at the NBER Conference on International Dimensions of Monetary Policy, S’Agaro, Catalonia, Spain, June 12.

      Mishkin, Frederic, and MiguelSavastano, 2001, “Monetary Policy Strategies for Latin America,”Journal of Development Economics,Vol. 66, No. 2, pp. 41544.

      Mishkin, Frederic, and MiguelSavastano, 2002, “Monetary Policy Strategies for Emerging Market Countries: Lessons from Latin America,”Comparative Economic Studies,Vol. 44, No. 2 (Summer), pp. 4583.

      Mohanty, M.S., and MarcKlau, 2004, “Monetary Policy Rules in Emerging Market Economies: Issues and Evidence,”BIS Working Paper No. 149 (Basel: Bank for International Settlements).

      Monacelli, Tommaso, 2004, “Into the Mussa Puzzle: Monetary Policy Regimes and the Real Exchange Rate in a Small Open Economy,”Journal of International Economics,Vol. 62 (January), pp. 191217.

      Monetary Authority of Singapore, 2001, Singapore’s Exchange Rate Policy (Singapore).

      Monetary Authority of Singapore, 2007, Monetary Policy Operations in Singapore (Singapore, April). Available at:

      Morandé, Felipe, and KlausSchmidt-Hebbel, 2000, “Monetary Policy and Inflation Targeting in Chile,” in Inflation Targeting in Practice: Strategic and Operational Issues and Application to Emerging Market Economies,ed. by M.Blejer and others (Washington: International Monetary Fund), pp. 6069.

      Morón, Eduardo, and DiegoWinkelried, 2005, “Monetary Policy Rules for Financially Vulnerable Economies,”Journal of Development Economics,Vol. 76 (February), pp. 2351.

      Mwase, Nkunde, 2006, “An Empirical Investigation of the Exchange Rate Pass-Through to Inflation in Tanzania,”IMF Working Paper 06/150 (Washington: International Monetary Fund).

      Nelson, William, 2008, “Monetary Policy Decisions: Preparing the Inputs and Communicating the Outcomes,”BIS Papers,Vol. 37 (Basel: Bank for International Settlements).

      Nogueira Júnior, Reginaldo P., and MiguelA. León-Ledesma, 2008a, “Exchange Rate Pass-Through into Inflation: The Role of Asymmetries and NonLinearities,”Studies in Economics No. 0801 (Kent, England: Department of Economics, University of Kent).

      Nogueira Júnior, Reginaldo P., and MiguelA. León-Ledesma, 2008b, “Is Low Inflation Really Causing the Decline in Exchange Rate Pass-Through?” (unpublished, November). Available at:

      Ötker-Robe, Inci, and DavidVávra, eds., 2007, Moving to Greater Exchange Rate Flexibility: Operational Aspects Based on Lessons from Detailed Country Experiences, IMF Occasional Paper No. 256 (Washington: International Monetary Fund).

      Parrado, Eric, 2004a, “Singapore’s Unique Monetary Policy: How Does It Work?”IMF Working Paper 04/10 (Washington: International Monetary Fund).

      Parrado, Eric, 2004b, “Inflation Targeting and Exchange Rate Rules in an Open Economy,”IMF Working Paper 04/21 (Washington: International Monetary Fund).

      Ragan, Christopher, 2005, “The Exchange Rate and Canadian Inflation Targeting,”Bank of Canada Working Paper 2005/34 (Ottawa, Ontario: Bank of Canada).

      Ravenna, Federico, and FabioNatalucci, 2008, “Monetary Policy Choices in Emerging Market Economies: The Case of High Productivity Growth,”Journal of Money, Credit and Banking,Vol. 40, Nos. 2–3, pp. 24471.

      Reyes, Javier, 2007, “Exchange Rate Pass-Through Effects and Inflation Targeting in Emerging Economies: What Is the Relationship?”Review of International Economics,Vol. 15, No. 3, pp. 53859.

      Rodrik, Dani, 2007, “The Real Exchange Rate and Economic Growth: Theory and Evidence” (unpublished; Cambridge, Massachusetts: John F. Kennedy School of Government, Harvard University).

      Roger, Scott, JorgeRestrepo, and CarlosGarcia, 2009, “Hybrid Inflation Targeting Regimes,”IMF Working Paper 09/234 (Washington: International Monetary Fund).

      Roger, Scott, and Mark R.Stone, 2005. “On Target? The International Experience with Achieving Inflation Targets,”IMF Working Paper 05/163 (Washington: International Monetary Fund).

      Rudebusch, Glenn D., and Lars E. O.Svensson, 1998, “Policy Rules for Inflation Targeting,”CEPR Discussion Paper No. 1999 (London: Centre for Economic Policy Research).

      Sarel, Michael, 1996, “Nonlinear Effects of Inflation on Economic Growth,”Staff Papers, International Monetary Fund, Vol. 43, pp. 199215.

      Sarno, Lucio, and Mark P.Taylor, 2001, “The Microstructure of the Foreign Exchange Market,” Princeton Studies in International Economics No. 89 (Princeton, New Jersey: Princeton University, International Economics Section).

      Scalia, Antonio, 2004, “Is Foreign Exchange Intervention Effective? Some Micro-Analytical Evidence from Central Europe” (unpublished; Rome: Bank of Italy).

      Schabert, Andreas, and Sweder VanWijnbergen, 2006, “Debt, Deficits, and Destabilizing Monetary Policy in Open Economies,”Tinbergen Institute Discussion Paper No. TI 2006-045/2 (Amsterdam: Tinbergen Institute).

      Schaechter, Andrea, MarkStone, and MarkZelmer, 2000, Adopting Inflation Targeting: Practical Issues for Emerging Market Countries, IMF Occasional Paper No. 202 (Washington: International Monetary Fund).

      Schmidtt-Grohé, Stephanie, and MartinUribe, 2003, “Closing Small Open Economy Models,”Journal of International Economics,Vol. 61, pp. 16385.

      Schmidt-Hebbel, Klaus, and MatíasTapia, 2002, “Monetary Policy Implementation and Results in Twenty Inflation Targeting Countries,”Central Bank of Chile Working Paper No. 166 (Santiago: Central Bank of Chile).

      Schmidt-Hebbel, Klaus, and AlejandroWerner, 2002, “Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate,”Central Bank of Chile Working Paper No. 171 (Santiago: Central Bank of Chile, July).

      Smets, Frank, and RafaelWouters, 2002, “Openness, Imperfect Exchange Rate Pass-through and Monetary Policy,”Journal of Monetary Economics,Vol. 49 (July), pp. 94781.

      South African Reserve Bank, various years, Annual Report, Monetary Policy Review, Policy Statement (Pretoria).

      Spencer, Grant, 2007, “Recent Intervention by the Reserve Bank of New Zealand in the Foreign Exchange Market,”BIS Review,Vol. 73 (Basel: Bank for International Settlements), pp. 12.

      Stephens, Dominick, 2006, “Should Monetary Policy Attempt to Reduce Exchange Rate Volatility in New Zealand?” Reserve Bank of New Zealand Discussion Paper 2006/05 (Wellington: Reserve Bank of New Zealand).

      Stone, Mark, 2003, “Inflation Targeting Lite,”IMF Working Paper 03/12 (Washington: International Monetary Fund).

      Stone, Mark, and AshokBhundia, 2004, “A New Taxonomy of Monetary Regimes,”IMF Working Paper 04/191 (Washington: International Monetary Fund).

      Stone, Mark R., SeiichiShimizu, AnnaNordstrom, and Hervé J.Ferhani, 2008, Developing Essential Financial Markets in Smaller Economies: Stylized Facts and Policy Options, IMF Occasional Paper No. 265 (Washington: International Monetary Fund).

      Svensson, Lars E.O., 2000, “Open-Economy Inflation Targeting,”Journal of International Economics,Vol. 50 (February), pp. 15583.

      Svensson, Lars E.O., and Glenn D.Rudebusch, 1999, “Policy Rules for Inflation Targeting,”CEPR Discussion Paper No. 1999 (London: Centre for Economic Policy Research).

      Tapia, Matías, and AndreaTokman, 2004, “Effects of Foreign Exchange Intervention Under Public Information: The Chilean Case,”Central Bank of Chile Working Paper No. 255 (Santiago: Central Bank of Chile).

      Taylor, John, 2000, “Low Inflation, Pass-Through, and the Pricing Power of Firms,”European Economic Review,Vol. 44, pp. 13891408.

      Taylor, John, 2001, “The Role of the Exchange Rate in Monetary-Policy Rules,”American Economic Review,Vol. 91 (May), pp. 26367.

      Tovar, Camilo, 2006, “Devaluations, Output and the Balance Sheet Effect: A Structural Econometric Analysis,”BIS Working Paper No. 215 (Basel: Bank for International Settlements).

      Truman, Edwin M., 2003, Inflation Targeting in the World Economy (Washington: Peterson Institute for International Economics).

      Van der Merwe, E.J., 2004, “Inflation Targeting in South Africa,” Occasional Paper No. 19 (Pretoria: South African Reserve Bank).

      Wollmershäuser, Timo, 2006, “Should Central Banks React to Exchange Rate Movements? An Analysis of the Robustness of Simple Policy Rules under Exchange Rate Uncertainty,”Journal of Macroeconomics,Vol. 28, pp. 493519.

      World Bank, 2007, “Financial Flows to Developing Countries: Recent Trends and Prospects,” in Global Development Finance 2007: The Globalization of Corporate Finance in Developing Countries (Washington).

    Recent Occasional Papers of the International Monetary Fund

    267. The Role of the Exchange Rate in Inflation-Targeting Emerging Economies, by Mark Stone, Scott Roger, Seiichi Shimizu, Anna Nordstrom, Turgut Kişinbay, and Jorge Restrepo. 2009.

    266. The Debt Sustainability Framework for Low-Income Countries, by Bergljot Bjørnson Barkbu, Christian Beddies, and Marie-Hélène Le Manchec. 2008.

    265. Developing Essential Financial Markets in Smaller Economies: Stylized Facts and Policy Options, by Hervé Ferhani, Mark Stone, Anna Nordstrom, and Seiichi Shimizu. 2008.

    264. Reaping the Benefits of Financial Globalization, by Giovanni Dell’Ariccia, Julian di Giovanni, André Faria, Ayhan Kose, Paolo Mauro, Jonathan D. Ostry, Martin Schindler, and Marco Terrones. 2008.

    263. Macroeconomic Implications of Financial Dollarization The Case of Uruguay, edited by Marco Piñón, Gaston Gelos, and Alejandro López-Mejía. 2008.

    262. IMF Support and Crisis Prevention, by Atish Ghosh, Bikas Joshi, Jun Il Kim, Uma Ramakrishnan, Alun Thomas, and Juan Zalduendo. 2008.

    261. Exchange Rate Assessments: CGER Methodologies, by Jaewoo Lee, Gian Maria Milesi-Ferretti, Jonathan D. Ostry, Luca Antonio Ricci, and Alessandro Prati. 2008.

    260. Managing the Oil Revenue Boom: The Role of Fiscal Institutions, by Rolando Ossowski, Mauricio Villafuerte, Paulo A. Medas, and Theo Thomas. 2008.

    259. Macroeconomic Consequences of Remittances, by Ralph Chami, Adolfo Barajas, Thomas Cosimano, Connel Fullenkamp, Michael Gapen, and Peter Montiel. 2008.

    258. Northern Star: Canada’s Path to Economic Prosperity, edited by Tamim Bayoumi, Vladimir Klyuev, and Martin Mühleisen. 2007.

    257. Economic Growth and Integration in Central America, edited by Dominique Desruelle and Alfred Schipke. 2007.

    256. Moving to Greater Exchange Rate Flexibility: Operational Aspects Based on Lessons from Detailed Country Experiences, by Inci Ötker-Robe and David Vávra, and a team of IMF economists. 2007.

    255. Sovereign Debt Restructuring and Debt Sustainability: An Analysis of Recent Cross-Country Experience, by Harald Finger and Mauro Mecagni. 2007.

    254. Country Insurance: The Role of Domestic Policies, by Törbjörn Becker, Olivier Jeanne, Paolo Mauro, Jonathan D. Ostry, and Romain Rancière. 2007.

    253. The Macroeconomics of Scaling Up Aid: Lessons from Recent Experience, by Andrew Berg, Shekhar Aiyar, Mumtaz Hussain, Shaun Roache, Tokhir Mirzoev, and Amber Mahone. 2007.

    252. Growth in the Central and Eastern European Countries of the European Union, by Susan Schadler, Ashoka Mody, Abdul Abiad, and Daniel Leigh. 2006.

    251. The Design and Implementation of Deposit Insurance Systems, by David S. Hoelscher, Michael Taylor, and Ulrich H. Klueh. 2006.

    250. Designing Monetary and Fiscal Policy in Low-Income Countries, by Abebe Aemro Selassie, Benedict Clements, Shamsuddin Tareq, Jan Kees Martijn, and Gabriel Di Bella. 2006.

    249. Official Foreign Exchange Intervention, by Shogo Ishi, Jorge Iván Canales-Kriljenko, Roberto Guimarães, and Cem Karacadag. 2006.

    248. Labor Market Performance in Transition: The Experience of Central and Eastern European Countries, by Jerald Schiff, Philippe Egoumé-Bossogo, Miho Ihara, Tetsuya Konuki, and Kornélia Krajnyák. 2006.

    247. Rebuilding Fiscal Institutions in Post-Conflict Countries, by Sanjeev Gupta, Shamsuddin Tareq, Benedict Clements, Alex Segura-Ubiergo, Rina Bhattacharya, and Todd Mattina. 2005.

    246. Experience with Large Fiscal Adjustments, by George C. Tsibouris, Mark A. Horton, Mark J. Flanagan, and Wojciech S. Maliszewski. 2005.

    245. Budget System Reform in Emerging Economies: The Challenges and the Reform Agenda, by Jack Diamond. 2005.

    244. Monetary Policy Implementation at Different Stages of Market Development, by a staff team led by Bernard J. Laurens. 2005.

    243. Central America: Global Integration and Regional Cooperation, edited by Markus Rodlauer and Alfred Schipke. 2005.

    242. Turkey at the Crossroads: From Crisis Resolution to EU Accession, by a staff team led by Reza Moghadam. 2005.

    241. The Design of IMF-Supported Programs, by Atish Ghosh, Charis Christofides, Jun Kim, Laura Papi, Uma Ramakrishnan, Alun Thomas, and Juan Zalduendo. 2005.

    240. Debt-Related Vulnerabilities and Financial Crises: An Application of the Balance Sheet Approach to Emerging Market Countries, by Christoph Rosenberg, Ioannis Halikias, Brett House, Christian Keller, Jens Nystedt, Alexander Pitt, and Brad Setser. 2005.

    239. GEM: A New International Macroeconomic Model, by Tamim Bayoumi, with assistance from Douglas Laxton, Hamid Faruqee, Benjamin Hunt, Philippe Karam, Jaewoo Lee, Alessandro Rebucci, and Ivan Tchakarov. 2004.

    238. Stabilization and Reforms in Latin America: A Macroeconomic Perspective on the Experience Since the Early 1990s, by Anoop Singh, Agnès Belaisch, Charles Collyns, Paula De Masi, Reva Krieger, Guy Meredith, and Robert Rennhack. 2005.

    237. Sovereign Debt Structure for Crisis Prevention, by Eduardo Borensztein, Marcos Chamon, Olivier Jeanne, Paolo Mauro, and Jeromin Zettelmeyer. 2004.

    236. Lessons from the Crisis in Argentina, by Christina Daseking, Atish R. Ghosh, Alun Thomas, and Timothy Lane. 2004.

    235. A New Look at Exchange Rate Volatility and Trade Flows, by Peter B. Clark, Natalia Tamirisa, and Shang-Jin Wei, with Azim Sadikov and Li Zeng. 2004.

    234. Adopting the Euro in Central Europe: Challenges of the Next Step in European Integration, by Susan M. Schadler, Paulo F. Drummond, Louis Kuijs, Zuzana Murgasova, and Rachel N. van Elkan. 2004.

    233. Germany’s Three-Pillar Banking System: Cross-Country Perspectives in Europe, by Allan Brunner, Jörg Decressin, Daniel Hardy, and Beata Kudela. 2004.

    232. China’s Growth and Integration into the World Economy: Prospects and Challenges, edited by Eswar Prasad. 2004.

    231. Chile: Policies and Institutions Underpinning Stability and Growth, by Eliot Kalter, Steven Phillips, Marco A. Espinosa-Vega, Rodolfo Luzio, Mauricio Villafuerte, and Manmohan Singh. 2004.

    230. Financial Stability in Dollarized Countries, by Anne-Marie Gulde, David Hoelscher, Alain Ize, David Marston, and Gianni De Nicolò. 2004.

    229. Evolution and Performance of Exchange Rate Regimes, by Kenneth S. Rogoff, Aasim M. Husain, Ashoka Mody, Robin Brooks, and Nienke Oomes. 2004.

    228. Capital Markets and Financial Intermediation in The Baltics, by Alfred Schipke, Christian Beddies, Susan M. George, and Niamh Sheridan. 2004.

    227. U.S. Fiscal Policies and Priorities for Long-Run Sustainability, edited by Martin Mühleisen and Christopher Towe. 2004.

    226. Hong Kong SAR: Meeting the Challenges of Integration with the Mainland, edited by Eswar Prasad, with contributions from Jorge Chan-Lau, Dora Iakova, William Lee, Hong Liang, Ida Liu, Papa N’Diaye, and Tao Wang. 2004.

    225. Rules-Based Fiscal Policy in France, Germany, Italy, and Spain, by Teresa Dában, Enrica Detragiache, Gabriel di Bella, Gian Maria Milesi-Ferretti, and Steven Symansky. 2003.

    224. Managing Systemic Banking Crises, by a staff team led by David S. Hoelscher and Marc Quintyn. 2003.

    223. Monetary Union Among Member Countries of the Gulf Cooperation Council, by a staff team led by Ugo Fasano. 2003.

    222. Informal Funds Transfer Systems: An Analysis of the Informal Hawala System, by Mohammed El Qorchi, Samuel Munzele Maimbo, and John F. Wilson. 2003.

    221. Deflation: Determinants, Risks, and Policy Options, by Manmohan S. Kumar. 2003.

    220. Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, by Eswar S. Prasad, Kenneth Rogoff, Shang-Jin Wei, and Ayhan Kose. 2003.

    Note: For information on the titles and availability of Occasional Papers not listed, please consult the IMF’s Publications Catalog or contact IMF Publication Services.

    See the overview of the synthesis of approaches in Goodfriend and King (1998), Clarida, Galí, and Gertler (1999), and Galí and Gertler (2007).

    Variables with a hat, e.g., c^t, represent the (log) deviation of the level of the variable Ct from its steady-state or long-run value c¯t.

    Note that although some households may be constrained to follow a rule of thumb in consumption, it is assumed that all households are free to optimize their supply of labor services.

    See also Morón and Winkelried (2005). Gertler, Gilchrist, and Natalucci (2003) develop a closely related alternative to modeling this risk premium.

    The risk premium elasticity with respect to imports and exports are assumed to be equal for each country type on the presumption that capital market participants do not distinguish between whether a movement in the current account balance reflects changes in imports or exports.

    The shocks have a mean of zero and a standard deviation of one. Thus, the shock could be interpreted as a 1 percent shock with the responses of the variables being percentage deviations from steady state (Galí and Monarelli, 2005).

    Each simulation run uses a different initial seed for the random number generation so that each run is genuinely different. The same set of seeds, however, are used for each kind of shock to ensure that differences in results for the different kinds of shocks are not attributable to the particular random draws.

    The selection of the 100th–120th observations is to ensure that the observations in the sample are dominated by cross-sectional rather than longitudinal variation and also that they are free from the influence of initial conditions.

      You are not logged in and do not have access to this content. Please login or, to subscribe to IMF eLibrary, please click here

      Other Resources Citing This Publication