Stability and Transitions in Emerging Market Policy Rules

Ashima Goyal and Shruti Tripathi
Additional contact information
Shruti Tripathi: National Institute of Public Finance and Policy, Delhi

Indian Economic Review, 2014, vol. 49, issue 2, 153-172

Abstract: Conditions for stability in an open economy dynamic stochastic general equilibrium model adapted to a dualistic labor market (SOEME) are the same as for a mature economy. But the introduction of monetary policy transmission lags makes it deviate from the Taylor Principle. Under rational expectations a policy rule is unstable, but under adaptive expectations traditional stabilization gives a determinate path, with weights on the objective of less than unity. Estimation of a Taylor rule for India and optimization in the SOEME model itself, all confirm the low weights. The results imply that under rational expectations, optimization is better than following a rule. If backward lookingbehavior dominates, however, a policy rule can prevent overshooting and instability. Economy-specific rigidities must inform policy design, and the appropriate design will change as the economy develops.

Keywords: DSGE; Emerging Market; Rigidities; Stability; Optimization; Taylor Rule (search for similar items in EconPapers)
JEL-codes: E26 E52 (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (1)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Stability and Transitions in Emerging Market Policy Rules (2015)
Working Paper: Stability and transitions in emerging market policy rules (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:dse:indecr:0088

Ordering information: This journal article can be ordered from
http://www.ierdse.org/

Access Statistics for this article

Indian Economic Review is currently edited by Pami Dua (Editor) & Ram Singh (Associate Editor) and Sunil Kanwar

More articles in Indian Economic Review from Department of Economics, Delhi School of Economics University of Delhi, Delhi 110 007. Contact information at EDIRC.
Bibliographic data for series maintained by Pami Dua ().