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Incentives from Exchange Rate Regimes in an Institutional Context

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  • Goyal, Ashima

Abstract

An open economy macromodel, calibrated to typical institutions and shocks of a populous emerging market economy, shows that a monetary stimulus preceding a supply shock can abort inflation at minimum output cost, since of the appreciation of exchange rates, accompanying a fall in interest rates and rise in output. Analytic results obtained for two periods are generalized through simulations and validated through estimation. One instrument achieves both domestic output and exchange rate objectives, partly since it creates correct incentives for foreign exchange traders. Strategic interactions imply supporting institutions are required to coordinate monetary, fiscal policy, and markets to the optimal equilibrium.

Suggested Citation

  • Goyal, Ashima, 2008. "Incentives from Exchange Rate Regimes in an Institutional Context," MPRA Paper 24310, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:24310
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    References listed on IDEAS

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    1. Goyal, Ashima & Pujari, Ayan Kumar, 2005. "Identifying long run supply curve of India," MPRA Paper 24021, University Library of Munich, Germany.
    2. Planning Commission, 2006. "An Approach to the 11th Five Year Plan: Towards Faster and More Inclusive Growth," Working Papers id:569, eSocialSciences.
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    6. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330, National Bureau of Economic Research, Inc.
    7. Ashima Goyal, 2005. "Dictatorship, Democracy and Institutions: Macropolicy in China and India," Working Papers id:264, eSocialSciences.
    8. Goyal, Ashima, 2002. "Coordinating monetary and fiscal policies: a role for rules?," MPRA Paper 29200, University Library of Munich, Germany.
    9. Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism and Macroeconomic Volatility," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1359-1397.
    10. Richard K. Lyons, 2006. "The Microstructure Approach to Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262205x, April.
    11. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    12. Robert H. Bates & Avner Greif & Margaret Levi & Jean-Laurent, 1998. "Analytic Narratives," Economics Books, Princeton University Press, edition 1, volume 1, number 6355.
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    Citations

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    Cited by:

    1. Ashima Goyal, 2014. "History of Monetary Policy in India Since Independence," SpringerBriefs in Economics, Springer, edition 127, number 978-81-322-1961-3, October.
    2. Ashima Goyal, 2012. "The Future Of Financial Liberalization In South Asia," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 19(1), pages 63-96, June.
    3. Sadhan Kumar Chattopadhyay & Arghya Kusum Mitra, 2023. "Monetary policy transmission in India under the base rate and MCLR regimes: a comparative study," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-14, December.
    4. Ashima Goyal, 2010. "Inflationary pressures in South Asia," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 17(2), pages 1-42, December.
    5. Ashima Goyal, 2009. "The Natural Interest Rate In Emerging Markets," World Scientific Book Chapters, in: Bhaskar Dutta & Tridip Ray & E Somanathan (ed.), New And Enduring Themes In Development Economics, chapter 15, pages 333-368, World Scientific Publishing Co. Pte. Ltd..
    6. Rajendra Narayan Paramanik & Bandi Kamaiah, 2014. "A Structural Vector Autoregression Model for Monetary Policy Analysis in India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 8(4), pages 401-429, November.
    7. Goyal, Ashima, 2011. "A general equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market," Economic Modelling, Elsevier, vol. 28(3), pages 1392-1404, May.
    8. Ashima Goyal, 2008. "The Structure of Inflation, Information and Labour Markets - Implications for monetary policy," Macroeconomics Working Papers 22378, East Asian Bureau of Economic Research.
    9. Mishra, Ankita & Mishra, Vinod, 2012. "Evaluating inflation targeting as a monetary policy objective for India," Economic Modelling, Elsevier, vol. 29(4), pages 1053-1063.
    10. Ashima Goyal, 2015. "Understanding High Inflation Trend in India," South Asian Journal of Macroeconomics and Public Finance, , vol. 4(1), pages 1-42, June.
    11. Goyal, Ashima, 2006. "Macroeconomic policy and the exchange rate: working together?," MPRA Paper 27768, University Library of Munich, Germany.
    12. Kapur, Muneesh & Behera, Harendra, 2012. "Monetary Transmission Mechanism in India: A Quarterly Model," MPRA Paper 70631, University Library of Munich, Germany.
    13. Goyal, Ashima, 2012. "Propagation Mechanisms in Inflation: Governance as key," MPRA Paper 46360, University Library of Munich, Germany.

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    More about this item

    Keywords

    Emerging Market Economy; Mundell-Fleming; Monetary Policy; FX Market; Supply Shocks;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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