Social and Behavioral Sciences Commons^™

On Some Subtle Implications Of The Choice Of Numeraire For Monetary Policy In Developing Countries, Eduardo Zambrano

Economics

Numeraire choice is often deemed a problem of purely analytical convenience. In this paper I show that there is more to numeraire selection than meets the eye for the formulation of monetary policy in countries with weak fiscal institutions. I show how (a) improper numeraire choice can dramatically overstate or understate Central Bank profits and (b) how this can threaten the ability of a Central Bank to keep inflation under control. I show point (a) in the context of Monte Carlo experiments calibrated for the Venezuelan economy and point (b) in an infinitely lived representative agent model that illustrates the …