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We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.

Zonder onderwerpscode: economie

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Despite a substantial and prolonged exchange rate depreciation, South Africa’s export performance has disappointed since the global financial crisis. In this paper we focus on the role of structural factors in reducing the responsiveness of South African exports to the real exchange rate depreciation. To this end, we construct a unique database of export performance at the firm level. Our analysis suggests that electricity bottlenecks, limited product market competition, and labor market constraints have reduced the responsiveness of firms’ exports to the rand depreciation. On the other hand, a firm’s ability to diversify its exports has helped it benefit more from currency movements.

Exports --- Foreign exchange rates --- Electric power --- Electric power supply --- Power supply, Electric --- Power resources --- Exchange rates --- Fixed exchange rates --- Flexible exchange rates --- Floating exchange rates --- Fluctuating exchange rates --- Foreign exchange --- Rates of exchange --- International trade --- Rates --- Investments: Energy --- Exports and Imports --- Foreign Exchange --- Investments: General --- Empirical Studies of Trade --- Current Account Adjustment --- Short-term Capital Movements --- Macroeconomic Analyses of Economic Development --- Trade: General --- Investment --- Capital --- Intangible Capital --- Capacity --- Electric Utilities --- International economics --- Currency --- Macroeconomics --- Investment & securities --- Export performance --- Real effective exchange rates --- Depreciation --- Electricity --- National accounts --- Commodities --- Saving and investment --- Electric utilities --- South Africa

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In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.

Zonder onderwerpscode: economie

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We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.