Monetary Policy in Oil Exporting Countries with Fixed Exchange Rate and Open Capital Account: Expectations Matter

Omar Chafik

Journal of Business Cycle Research, 2023, vol. 19, issue 1, No 1, 22 pages

Abstract: Abstract This paper shows that for UAE, an oil exporting country with pegged exchange rate and open capital account, adjusting nominal interest rate only to foreign rate could be economically inconsistent. By incorporating a market-expected exchange rate mechanism in a semi-structural New Keynesian Model, this paper highlights the role of oil prices and expectations for shocks transmission and underlines the relatively over-valuated UAE policy exchange rate between 2010 and 2019. The assessment of NIR shows that this over-valuation was not completely compensated, and in average the monetary policy was too accommodative than it had to be.

Keywords: Monetary policy; Exchange rate; New Keynesian model; UIP condition; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C32 E30 E52 O24 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s41549-022-00073-x

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