Optimal monetary and exchange rate frameworks for commodity-exposed economies

Thomas Drechsel, Michael McLeay, Silvana Tenreyro and Enrico Turri

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We show that the optimal monetary and exchange rate frameworks depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions depend on the commodity cycle. Stabilizing domestic prices is optimal for commodity exporters, in line with standard open-economy policy prescriptions. But when economies import commodities as production inputs, optimal policy largely ‘looks through’ their direct and indirect effects on domestic prices. In emerging economies, where financial conditions are closely related to commodity cycles, trade-offs are starker and limited credibility may make implementing optimal policy challenging.

Keywords: monetary policy; exchange rates; inflation targeting; commodity prices; small open economy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F41 Q30 (search for similar items in EconPapers)
Date: 2026-09-07
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Published in Journal of International Economics, 7, September, 2026. ISSN: 0022-1996

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