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 language | English |
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Pages (from-to) | 88-98 |
Number of pages | 11 |
Journal | Economic Modelling |
Volume | 36 |
DOIs | |
Publication status | Published - 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