Uncertainty Shocks and Monetary Policy Rules in a Small Open Economy

Sargam Gupta
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Abstract

Post great financial crisis (GFC) of 2008-2009, there has been a surge in the macroeconomics literature on aggregate uncertainty. Although the recent literature has recognized adverse real effects of global uncertainty shocks in EMEs, the role of monetary policy in mitigating these effects is not studied. This paper explores the role of exchange rates (both nominal and real) and monetary policy in amplifying/ stabilizing the real effects of global uncertainty shocks in a small open economy. We reproduce stylized facts showing significant movements in exchange rates when EMEs are hit with a global uncertainty shock. We find that flexible inflation targeting regime using interest rate rules (IRRs) with floating exchange rates is ineffective in stabilizing the domestic economy during periods of high global uncertainty. Using a small open economy NK-DSGE model, we show that inflation targeting regime using exchange rate rules (ERRs) reduces welfare losses significantly compared to IRRs. This result contradicts the conventional wisdom which states that monetary policy following an IRR under floating exchange rate is welfare-maximizing in a small open economy.
小型开放经济中的不确定性冲击与货币政策规则
2008-2009年大金融危机后,关于总体不确定性的宏观经济学文献激增。尽管最近的文献已经认识到全球不确定性冲击对新兴市场经济体的不利实际影响,但货币政策在缓解这些影响方面的作用尚未得到研究。本文探讨了汇率(名义和实际)和货币政策在放大/稳定小型开放经济体中全球不确定性冲击的实际影响方面的作用。当新兴市场受到全球不确定性冲击时,我们重现了显示汇率显著变动的程式化事实。我们发现,在全球经济高度不确定的时期,使用浮动汇率的利率规则的灵活通胀目标制在稳定国内经济方面是无效的。利用一个小型开放经济体NK-DSGE模型,我们表明,与IRRs相比,使用汇率规则(ERRs)的通胀目地制度显著减少了福利损失。这一结果与传统观点相矛盾,传统观点认为,在浮动汇率下,遵循内部收益率的货币政策在小型开放经济体中是福利最大化的。
本文章由计算机程序翻译,如有差异,请以英文原文为准。
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