Coordination between monetary policy and fiscal policy for an inflation targeting emerging market
Author
Aktas, Z.
Kaya, N.
Özlale, Ü.
Date
2010Source Title
Journal of International Money and Finance
Print ISSN
0261-5606
Electronic ISSN
1873-0639
Publisher
Pergamon Press
Volume
29
Issue
1
Pages
123 - 138
Language
English
Type
ArticleItem Usage Stats
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Abstract
Several studies including Blanchard (2004) and Favero and Giavazzi (2004) imply that in emerging market economies, a tight monetary policy within an inflation-targeting framework could actually increase the price level due to the lack of fiscal discipline and the associated high risk premium. We extend their arguments in two ways. First, we introduce a semi structural model with time-varying parameters, where the risk premium is 'unobserved' and it is derived within the system. Such an approach fits better with the volatile nature of emerging market economies by allowing us to track down the time-varying effects of macroeconomic dynamics on both the model-consistent risk premium and the other key variables. Second, we obtain impulse response functions and analyze the implications of a tight monetary policy on major macroeconomic variables. Taking the Turkish economy as our reference point, we find that the arguments of Blanchard (2004) and Favero and Giavazzi (2004) seem to be valid. © 2009 Elsevier Ltd. All rights reserved.