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

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6 Citations (Scopus)

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

Fingerprint

Exporting
Exchange rate policy
Dynamic general equilibrium
Oil
Primary commodities
Small open economy
Exchange rate regimes
Uncertainty
Currency
Flexible exchange rates
New Keynesian
Supply shocks
Welfare analysis
External shocks
Pricing
Oil prices
Productivity
Consumer welfare
Crude oil

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

Cite this

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title = "Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective",
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.",
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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.

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