A Floating versus Managed Exchange Rate Regime in a DSGE Model of India

In this paper the authors first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as aTaylor-type interestrate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. [Working Paper no 70] URL: [http://www.nipfp.org.in/newweb/sites/default/files/wp_2010_70.pdf]