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      Coordination between monetary policy and fiscal policy for an inflation targeting emerging market

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      Author
      Aktas, Z.
      Kaya, N.
      Özlale, Ü.
      Date
      2010
      Source 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
      Article
      Item Usage Stats
      130
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      158
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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.
      Keywords
      Extended Kalman filter
      Monetary policy
      Non-linear state space models
      Permalink
      http://hdl.handle.net/11693/22443
      Published Version (Please cite this version)
      http://dx.doi.org/10.1016/j.jimonfin.2009.07.008
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