Optimal monetary policy in a ‘sudden stop’

Optimal Monetary Policy in a ‘Sudden Stop’

During the Asian financial crises, interest rates were raised immediately, and then reduced sharply. We describe an environment in which this is the optimal monetary policy. ∗Northwestern University and Tilburg University. †Northwestern University, and NBER. ‡International Monetary Fund. §Braggion thanks the European Central Bank-Research Department for its hospitality. Christiano is grateful f...

Nber Working Paper Series a New Dilemma: Capital Controls and Monetary Policy in Sudden Stop Economies

We thank seminar participants at the Hong Kong Institute for Monetary Research, the UBC macro-lunch, and the Board of Governors of the Federal Reserve Bank for comments. Devereux thanks SSHRC, and the Royal Bank of Canada for financial support as well as support from ESRC award ES/1024174/1. Young thanks the financial support and hospitality of the HKIMR and the Bankard Fund for Political Econo...

Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort

1 Optimal Monetary Policy

We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we ...

Optimal Monetary Stabilization Policy∗