Using Monetary Policy Rules in Emerging Market Economies

Abstract: This paper shows that the use of monetary policy rules in emerging market economies has many of the same benefits that have been found in research and in practice in developed economies. For those emerging market economies that do not choose a policy of “permanently” fixing the exchange rate—perhaps through a currency board or dollarization, the only sound monetary policy is one based on the trinity of a flexible exchange rate, an inflation target, and a monetary policy rule.

However, market conditions in emerging market economies may require modifications of the typical policy rule that has been recommended for economies with more developed financial markets.