Oil Exporting Countries and Economic Diversification: The Role of Monetary and Fiscal Policies

Mohamed Benkhodja (), Xiaofei Ma () and Tovonony Razafindrabe ()
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Mohamed Benkhodja: ESSCA School of Management, France
Xiaofei Ma: ESSCA School of Management, France
Tovonony Razafindrabe: Université de Rennes

No 1680, Working Papers from Economic Research Forum

Abstract: In this study, we examined the role of monetary and fiscal policies in the diversification of oil-dependent economies. Indeed, the change in external condition due to recent pandemic event and international political frictions have profoundly impacted oil-exporting countries. On the demand side, they have endured an abrupt fall in world oil consumption due to lockdowns during pandemic crisis and are facing a potential decline of world oil demand as a result of a shift toward green production to reduce pollution to the planet. On the supply side, they are facing negative supply shocks on imported goods due to the disruption of the global value chain and the resulting stagnation of global supply chain. To provide some policy responses to the need for diversification of oil-exporting economies, we built a DSGE model including two production sectors and a banking system. We simulated different scenarios aiming at orienting monetary and fiscal policies towards supporting production in the non-oil sector. Our main results show that monetary policy loses its efficiency facing negative oil price shocks. The effects of oil exports on bank’s liquidity and credit in the market are much greater than Central Bank’s adjustment on the standard interest rate. However, by supporting the non-oil sector, fiscal policy and quatitative easing are efficient to reduce the contraction risk for oil-exporting economies.

Pages: 40
Date: 2023-12-20, Revised 2023-12-20
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Published by The Economic Research Forum (ERF)

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