This paper assesses the optimal setting of fiscal spending and foreign exchange rate intervention policies in response to volatile foreign aid, in a small open economy model that incorporates typical features of low-income countries. Within a class of policy rules, it jointly considers the...

Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often...

We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that management of the exchange rate greatly enhances the efficacy of inflation...

This paper establishes that output volatility and the size of output drops have declined across all countries over the past three decades, but remain considerably higher in developing countries than in industrial countries. The paper employs a Bayesian latent dynamic factor model to decompose...

Most developing countries have imposed restrictions on domestic and international financial transactions at one time or another. Such restrictions have allowed governments to generate significant proportions of their revenues from financial repression while restraining inflation. The eventual...

The paper develops a simple three-sector model of a developing country with nominal wage rigidity, in which one sector is thought of as the primary sector and the other two are sectors in which the country can diversify. The paper then analyzes the relationship between the market structure of...

We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net inflows, in three “post-stabilization.” African economies with de jure flexible exchange rates. Such shocks have beneficent long-run effects, but when currency substitution is high...

Based on evidence obtained from the IMF''s 2001 Survey on Foreign Exchange Market Organization, the author argues that, for several reasons, some central banks in developing and transition economies may be able to conduct foreign exchange intervention more effectively than the central banks of...

We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real...

This paper identifies the institutional and operational requisites for transitions to floating exchange rate regimes. In particular, it explores key issues underlying the transition, including developing a deep and liquid foreign exchange market, formulating intervention policies consistent with...