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Policy Rules and Large Crises in Emerging Markets

Author

Listed:
  • Emilio Espino
  • Julian Kozlowski
  • Fernando M. Martin
  • Juan M. Sanchez

Abstract

Emerging economies have adopted fiscal and monetary rules to discipline government policy. We study the value and macroeconomic implications of rules and flexibility within a sovereign-default model that incorporates domestic fiscal and monetary policies and long-term external debt. Adopting monetary targets and debt limits during normal times yields welfare gains. Suspending rules can significantly influence policy, macroeconomic outcomes, and welfare during large, unforeseen crises. The gains from flexibility depend on how quickly policymakers are able to reimpose rules after the crisis.

Suggested Citation

  • Emilio Espino & Julian Kozlowski & Fernando M. Martin & Juan M. Sanchez, 2022. "Policy Rules and Large Crises in Emerging Markets," Working Papers 2022-018, Federal Reserve Bank of St. Louis, revised 27 Jun 2024.
    • Handle: RePEc:fip:fedlwp:94688
    DOI: 10.20955/wp.2022.018
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    More about this item

    Keywords

    crises; default; sovereign debt; emerging markets; exchange rate; inflation; fiscal policy; monetary policy; rules; discretion; Markov-perfect equilibrium; COVID-19;
    All these keywords.

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