Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172922
Authors: 
Iyer, Tara
Year of Publication: 
2016
Series/Report no.: 
Working Paper 2016-06
Abstract: 
The majority of households across emerging market economies are excluded from the financial markets and cannot smooth consumption. I analyze the implications of this for optimal monetary policy and the corresponding choice of domestic versus external nominal anchor in a small open economy framework with nominal rigidities, aggregate uncertainty, and financial exclusion. I find that, if set optimally, monetary policy smooths the consumption of financially-excluded agents by stabilizing their income. Even though CPI inflation targeting approximates optimal monetary policy when financial inclusion is high, targeting the exchange rate is appropriate if financial inclusion is limited. Nominal exchange rate stability, upon shocks that create trade-offs for monetary policy, directly stabilizes the import component of financially-excluded agents' consumption baskets, which smooths their consumption and reduces macroeconomic volatility. This study provides a counterpoint to Milton Friedman's long-standing argument for a float.
Subjects: 
Asymmetric Risk-Sharing
Fixed Exchange Rates
Financial Exclusion
Optimal Monetary Policy
Emerging Market Economies
JEL: 
F21
F31
E24
E52
F43
Document Type: 
Working Paper
Social Media Mentions:

Files in This Item:
File
Size
927.68 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.