Monetary policy options for managing resource revenue shocks when fiscal policy is laissez-faire

Chuku Chuku

Economic Change and Restructuring, 2020, vol. 53, issue 1, No 6, 113-138

Abstract: Abstract This study examines the implications of alternative monetary policy regimes to deal with resource revenue shocks when fiscal policy is laissez-faire—that is, when the government spends all resource revenue windfalls contemporaneously. A three-sector dynamic stochastic general equilibrium model is used. The model features key structural characteristics of resource-rich developing economies, such as the Dutch disease, limited international capital mobility, credit constrained consumers, and limited labour mobility. The model is calibrated to match a typical resource-rich developing economy. Three alternative monetary policy regimes are considered: a flexible exchange rate, a crawling peg, and a money growth target. The policy evaluation exercise indicates that a flexible exchange rate with inflation targeting regime is the best among the policy options considered. Specifically, this option yields a meager 0.16 percent loss in welfare terms, compared with higher levels of welfare losses associated with a crawling peg with partial domestic absorption (0.17 percent), and a money growth target with full sterilization (0.26 percent).

Keywords: Windfall spending; Monetary policy; Dutch disease; New Keynesian models (search for similar items in EconPapers)
JEL-codes: E30 E58 E63 F41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10644-019-09244-w

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