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

Almukhtar Al-Abri

Economic Modelling, 2014, vol. 36, issue C, 88-98

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.

Keywords: Oil-exporting countries; Exchange rate regimes; New Keynesian Small Open Economy model; Welfare analysis; Primary-commodity economy (search for similar items in EconPapers)
JEL-codes: F33 F41 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:36:y:2014:i:c:p:88-98

DOI: 10.1016/j.econmod.2013.09.016

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