Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/64102
Authors: 
Natalucci, Fabio M.
Ravenna, Federico
Year of Publication: 
2007
Series/Report no.: 
Working Papers, Santa Cruz Center for International Economics 08-04
Abstract: 
We develop a general equilibrium model of an emerging market economy where productivity growth differentials between tradable and non-tradable sectors result in an equilibrium appreciation of the real exchange ratethe so-called Balassa-Samuelson effect. The paper explores the dynamic properties of this economy and the welfare implications of alternative policy rules. We show that the real exchange rate appreciation limits the range of policy rules that, with a given probability, keep inflation and exchange rate within predetermined numerical targets. We also find that the Balassa-Samuelson effect raises by an order of magnitude the welfare loss associated with policy rules that prescribe active exchange rate management.
Subjects: 
Balassa-Samuelson effect
optimal monetary policy
exchange rate regimes
emerging markets
European Monetary Union
JEL: 
E52
E31
F02
F41
Document Type: 
Working Paper

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