Alternative monetary policy regimes in an oil-exporting economy

Hamed Ghiaie, Hamid Reza Tabarraei and Hossein Tavakolian

The Quarterly Review of Economics and Finance, 2022, vol. 83, issue C, 161-177

Abstract: We assess alternative monetary policy regimes including a consumer price index (CPI) and a producer price index (PPI) targeting in a commodity-exporting economy with multiple currency practices (MCPs). Under these regimes, the central bank in our model (i) target the official exchange rate, (ii) target the growth rate of nominal monetary base, and (iii) intervene in the foreign exchange market to control the exchange rate gap. We find that using the PPI as the central bank's target produces less pro-cyclicality compared to monetary regimes with the CPI targeting. In addition, the PPI targeting results in lower welfare losses. We study these regimes under unified and MCPs as a characteristic of some commodity-exporters. We show that with a persistent external shock, MCPs could be effective at best in the short-run, while the aggregate welfare in the long-run can be diminished. We then illustrate that under both unified and MCPs regimes, the PPI targeting regime considerably performs better. Finally, we show that monetary instruments are more effective in the presence of a fiscal rule, based on commodity revenues.

Keywords: Multiple currency practices; CPI and PPI inflation targeting; Monetary policy; FX market (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:83:y:2022:i:c:p:161-177

DOI: 10.1016/j.qref.2021.11.003

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