Robust Monetary Policy Framework for Emerging Markets

Abstract

The primary objective of most central banks, whether or not they explicitly target inflation, is to keep inflation low and stable. The choice of the right price index that should be the focus of the inflation objective is a central operational issue in implementing monetary policy. This question takes on a very different hue in low- and middle-income economies. In these economies, food expenditures account for nearly half of total household expenditures, and a large proportion of the population works in a cash economy with little access to the formal financial system. The main objective of this research project is to analytically determine the price index that central banks should target in economies that have these features. This can help central banks implement monetary policy in a manner that promotes macroeconomic stability and economic welfare