Monetary Policy and Uncertainty in Emerging Market Economies

G. ROZENWURCEL

Financial Turmoil: Its Effects on Developed and Emerging Economies

Banco Central de la República Argentina

Lugar: Buenos Aires; Año: 2009; p. 223 - 236

The present paper is a summarized analysis of the relationship between uncertaintyand economic policy, and makes special reference to monetary policy inEmerging Market Economies.After this introduction, it consists of four sections. The first one presents abrief analysis of the mainstream academic view on the abovementioned relationshipand emphasizes its two-way nature. On the one hand, uncertainty abouteconomic performance determines economic policy decisions and their effectiveness,on the other hand -and under some circumstances- economic policymay become an autonomous source of uncertainty.In Section 2, we focus on Emerging Market Economies. Our thesis is that, inthe context of this economies, the economic policy may be “overdetermined”and, under some circumstances, it may unleash a cumulative process of uncertainty,credibility loss and increasing ineffectiveness in the results. The issue isframed within the dilemma faced by many of these economies during thegood times, driven by the ongoing increase in commodity prices before the onsetof the current international financial crisis: how should we deal with monetarypolicy so as to simultaneously meet the objectives of price stability and externalcompetitiveness?Next, in the third section, we describe the dilemma and its consequences withinthe context of the Argentine economy during the expansionary period betweenearly 2003 and mid 2008, where we suggest that the exchange rate interventionscheme of the monetary policy was no longer effective to deal with both objectiveswhen, for several reasons, the strong expansion in money demand witnessedafter the end of the Convertibility crisis came to a halt.The last section includes our conclusions.