financial crises, monetary policy rules, emerging markets, liability dollarization, bounded rational

Financial Crisis, Effective Policy Rules and Bounded Rationality in a New Keynesian Framework

This paper extends a standard open-economy New Keynesian model to examine the efficiency of alternative monetary policy rules (both fixed and nonlinear) during a period of financial crisis. A third-generation 'balance sheet effect' is made operational through an endogenous risk premium which impacts on investment. Special attention is given to alternative expectations structures and our findings under both rational expectations and adaptive learning establish the Taylor rule as the dominant policy.