Oil exporters: in search of an external anchor

Maurizio Michael Habib and Jan Stráský

No 958, Working Paper Series from European Central Bank

Abstract: This paper discusses the choice of an optimal external anchor for oil exporting economies, using optimum currency area criteria and simulations of a simple model of a small open economy pegging to a basket of two currencies. Oil exporting countries - in particular those of the Gulf Cooperation Council - satisfy a number of key optimum currency area criteria to adopt a peg. However, direction of trade and synchronisation of business cycle of oil exporters suggest that there is no single "ideal" external anchor among the major international currencies. Model simulations - parameterised for an oil exporting economy - indicate that a currency basket is generally preferable to a single currency peg, especially when some weight is placed by the policy maker on output stabilisation. Only when inflation becomes the only policy objective and external trade is mostly conducted in one currency that a peg to a single currency becomes optimal. JEL Classification: F31, C30, C51, C61, O24

Keywords: basket; exchange rate regimes; model simulation; oil exporting countries (search for similar items in EconPapers)
Date: 2008-11
Note: 334027
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2008958

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