TY - JOUR
T1 - Optimal exchange rate policy for a small oil-exporting country
T2 - A dynamic general equilibrium perspective
AU - Al-Abri, Almukhtar Saif
PY - 2014/1
Y1 - 2014/1
N2 - This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare.
AB - This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare.
KW - Exchange rate regimes
KW - New Keynesian Small Open Economy model
KW - Oil-exporting countries
KW - Primary-commodity economy
KW - Welfare analysis
UR - http://www.scopus.com/inward/record.url?scp=84885220135&partnerID=8YFLogxK
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U2 - 10.1016/j.econmod.2013.09.016
DO - 10.1016/j.econmod.2013.09.016
M3 - Article
AN - SCOPUS:84885220135
SN - 0264-9993
VL - 36
SP - 88
EP - 98
JO - Economic Modelling
JF - Economic Modelling
ER -