An Estimated Dynamic Stochastic General Equilibrium Model for Monetary Policy Analysis in Mozambique

Abstract

This paper evaluates monetary policy trade-offs in low-income countries using a dynamic stochastic general equilibrium model estimated on data for Mozambique, taking into account the sources of major exogenous shocks and the level of financial development. The simulations suggest that an exchange rate peg is significantly less successful than inflation-targeting at stabilizing the real economy due to higher interest rate volatility, as in the literature for industrial countries and emerging markets.