ALTERNATIVE MONETARY POLICY REGIMES IN FIVE EMERGING NATIONS: AN EMPIRICAL ANALYSIS

Macroeconomists and central bankers want to devise and propose monetary policies which will minimize the weighted average of real GDP growth and inflation rates and their deviations over a period of time under certain economic conditions. Developing and emerging nations are prone to demand and supply shocks more than developed nations generating disturbances in the trajectory of real GDP growth and inflation rates. In this dissertation, I have employed a three equation macro model to assess the comparative performances, in terms of real GDP growth and inflation rates, of three alternative monetary policies–Strict Inflation Targeting (SIT), Nominal GDP Targeting (NGDPT), and the Taylor Rule (TR)–in a sample of five emerging nations through counterfactual simulations. Using the three distinct monetary policies (MP), along with aggregate demand (AD) and Phillips curve (PC) equations, I have estimated the historical coefficient values, by applying ordinary least squares (OLS) estimation techniques to both single equation models and vector autoregression (VAR) systems, for the relevant economic variables to use in my simulations. NGDPT has never been adopted in any country, and a counterfactual simulation is the only way to compare its performance against SIT and TR. My estimated econometric results of the coefficient values under SIT, NGDPT, and TR equations suggest that all these countries followed a flexible version of Inflation Targeting (IT), placing some weight on output adjustment. My econometric results of the coefficient values are in line with Svensson (1997a), who argued that even an IT-following central bank should place some weight on output to help control expected inflation rates in the future since output or output gaps influence inflation rates via the PC.Using the estimated coefficient values from the historical data of my sample, I have estimated my Baseline simulation results of nominal interest rates, real GDP growth rates, and inflation rates counterfactually through the MPs, ADs, and PCs. Imposing theoretical coefficient values on MPs while not changing the estimated coefficient values on ADs and PCs, I have estimated two more sets–Moderate and Tight–of simulated results of nominal interest rates, real GDP growth rates, and inflation rates. The official MP of these five countries is IT. My simulated results under SIT for all these five countries follow the historical data very closely. It suggests that my three-equation macro model has captured the true dynamics of these countries well. The comparative performances of SIT and NGDPT, in terms of output and inflation, are very close. Simulated results under TR are not as superior as SIT and NGDPT in controlling inflation and generating output. Finally, I have tested my simulated results against the loss function methodology of Bhandari and Frankel (2017) to determine the most efficient MPs for my sample. According to Bhandari and Frankel (2017), the countries facing significant supply shocks and having less steep PCs will have better economic performance under NGDPT if the countries do not place a high weight on price stabilization in a TR relationship. The coefficient values on price stabilization in my estimates of MPs for my sample are low. The estimates of PCs in my sample show comparatively flat PCs. These five emerging nations also face significant supply shocks. However, the comparative analysis of SIT and NGDPT shows only a marginally superior performance of NGDPT over SIT. Though the lack of significant superior performance of NGDPT over SIT in these five emerging nations in my dissertation could be due to model specification and statistical power–the size of the sample, omitted variable bias, etc.–more research is needed to propose any regime change for these five emerging nations.