International Capital Flows and Monetary Policy in the Emerging Economies

. We extant small open market economy model which incorporates important elements of the economic and financial structure of emerging markets, such as high pass-through charges of exchange rates to import prices, low pass-through rates of exchange rates to trade prices, and shallow household financial marketplaces that give increase to sporadic obligatory leverage restrictions. Due to the latter, a complete halt accompanied by significant capital outflows may result in an economic meltdown. The abrupt stop presents a presiding trade-off for the central bank as production decreases while inflation goes up. Normally, there is a partial equilibrium trade-off since the possibility of future abrupt stop pushes a central bank to take monetary steadiness into account when deciding how to execute its policy. The best monetary policy is one that discourages domestic borrowing and capital outflows. All intra- and intertemporal exchanges can be reduced with the aid of capital flows administration and the central bank’s balance sheet measures. Fiscal policy is also important. More leverage and, thus, the higher tail danger for the economy are implied by higher public debt levels and worse fiscal policy.