Monetary policy rules in transition economies: the impact of ambiguity
- Publisher: Faculty of Arts and Social Sciences, Kingston University
economics | Monetary Policy; Transition Economies; Political Risk; Ambiguity
This paper discusses the potential benefits of monetary policy rules for transition economies [TEs]. It is argued that the nominal interest rate may fail to be the appropriate instrument in such rules. One reason is the amount of non-calculable political and economic risk inherent in TEs. These risks lead to a significant and volatile ambiguity premium in the interest rate over and above the normal risk premium, which makes the real equilibrium interest rate difficult to measure. Therefore, a monetary aggregate like the money base may be more appropriate as the instrument for monetary policy rules in TEs.