Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective

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Abstract

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.

Original languageEnglish
Pages (from-to)88-98
Number of pages11
JournalEconomic Modelling
Volume36
DOIs
Publication statusPublished - Jan 2014

Keywords

  • Exchange rate regimes
  • New Keynesian Small Open Economy model
  • Oil-exporting countries
  • Primary-commodity economy
  • Welfare analysis

ASJC Scopus subject areas

  • Economics and Econometrics

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