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dc.titleTrade Openness and Exchange Rate Management
dc.contributor.authorParrado, Eric
dc.contributor.authorHeresi, Rodrigo
dc.contributor.orgunitDepartment of Research and Chief Economist
dc.coverageChile
dc.coverageSingapore
dc.date.available2023-12-22T00:12:00
dc.date.issue2023-12-22T00:12:00
dc.description.abstractSingapore's unique monetary policy consists of a managed exchange rate framework that can be characterized as a Taylor-like reaction function with the nominal devaluation rate instead of the nominal interest rate as the main policy instrument. We build a small open economy New Keynesian model to estimate and characterize such a monetary rule from a welfare perspective. Welfare gains under an exchange rate rule (ERR) relative to the more standard interest rate-based Taylor rule (IRR) are unambiguously increasing in the degree of trade openness (defined as exports plus imports as a share of GDP). For Singapore, where trade openness is 280% of GDP, we estimate welfare gains of 1.48% of permanent consumption under an ERR. In a counterfactual thought experiment, we find that Chile, an established inflation-targeting economy using an IRR, would be better off under an ERR for any degree of openness above 100% (currently at 70%).
dc.format.extent63
dc.identifier.doihttp://dx.doi.org/10.18235/0005490
dc.identifier.urlhttps://publications.iadb.org/publications/english/document/Trade-Openness-and-Exchange-Rate-Management.pdf
dc.language.isoen
dc.publisherInter-American Development Bank
dc.subjectInflation
dc.subjectTrade Impact
dc.subjectMonetary Policy
dc.subjectEconomy
dc.subjectInvestment
dc.subjectExchange Rate
dc.subjectInterest Rate
dc.subjectRating
dc.subject.jelcodeE52 - Monetary Policy
dc.subject.jelcodeE58 - Central Banks and Their Policies
dc.subject.jelcodeF41 - Open Economy Macroeconomics
dc.subject.keywordsMonetary policy;Exchange rate management;Open economy macroeconomics
idb.identifier.pubnumberIDB-WP-01563
idb.operationRG-K1098
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