Fiscal–Monetary Interactions with Structural Distortions in Developing Economies

Fiscal–Monetary Interactions with Structural Distortions in Developing Economies | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Fiscal–Monetary Interactions with Structural Distortions in Developing Economies Mohamed Chakroun This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-8828953/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This paper develops a novel theoretical framework for monetary policy in developing economies characterized by multiple structural distortions. We construct a multisector general equilibrium model featuring formal and informal sectors, public enterprises, subsidized essential goods, and imperfect financial intermediation. Our key innovation is the introduction of a "Dynamic Policy Coordination Index" that explicitly models the strategic interactions between fiscal and monetary authorities under weak institutional environments. The framework yields a new class of monetary rules that optimally respond to distortionary subsidies, informality-driven inflation dynamics, and external vulnerability. Mathematical analysis and numerical simulations demonstrate that our approach outperforms conventional policy rules by simultaneously addressing inflation-exchange rate trade-offs while creating a path toward reduced fiscal dominance. The model provides a rigorous theoretical foundation for practical implementation in economies with high inflation, overvalued exchange rates, significant informality, and distortionary subsidies. JEL Classification: E52, E58, H50, O17 Structural Distortions Policy Coordination Informality Optimal Monetary Rules Multisector General Equilibrium Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-8828953","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":595485596,"identity":"2d82a816-ff2f-4a5d-a37c-d05ec27fa266","order_by":0,"name":"Mohamed Chakroun","email":"data:image/png;base64,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","orcid":"","institution":"German University of Technology","correspondingAuthor":true,"prefix":"","firstName":"Mohamed","middleName":"","lastName":"Chakroun","suffix":""}],"badges":[],"createdAt":"2026-02-09 10:10:10","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-8828953/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-8828953/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":106013933,"identity":"31c9858d-29fb-4967-9266-f19c3a2fa31d","added_by":"auto","created_at":"2026-04-02 12:27:21","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":603959,"visible":true,"origin":"","legend":"","description":"","filename":"newmonetaryrulepapersubmission.pdf","url":"https://assets-eu.researchsquare.com/files/rs-8828953/v1_covered_d8c2b716-2b04-4e30-ba11-4ba801a6b2b6.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Fiscal–Monetary Interactions with Structural Distortions in Developing Economies","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Structural Distortions, Policy Coordination, Informality, Optimal Monetary Rules, Multisector General Equilibrium","lastPublishedDoi":"10.21203/rs.3.rs-8828953/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-8828953/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis paper develops a novel theoretical framework for monetary policy in developing economies characterized by multiple structural distortions. 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