Monetary policy rules in transition economies: the impact of ambiguity

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Ghatak, Subrata ; Spanjers, Willy (2007)
  • Publisher: Faculty of Arts and Social Sciences, Kingston University
  • Subject: economics | Monetary Policy; Transition Economies; Political Risk; Ambiguity
    • jel: jel:E52 | jel:E50

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.
  • References (1)

    Ball, R. (1999), The Institutional Foundations of Monetary Commitment: A Comparative Analysis, World Development, Vol. 27, pp. 1821-42.

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