Optimal macroeconomic stabilization policy of food, metal, and energy price cycles in small open economies

Carlos García and Jesisbé Mejía

ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business

Abstract: This paper proposes an optimal strategy for stabilizing macroeconomic policy to address jointly the effects of changes in the prices of food, minerals and energy (oil). Our approach differs from the general literature, which analyzes the effects of a commodity boom and therefore the solutions in terms of economic policy separately, that is, by type of commodity. The stabilization strategy that we propose considers a key fact affecting many small open economies, namely, that they not only are affected by increases in commodity prices, but also benefit from them. Consequently, we use a DSGE model for a small open economy with restricted households to show that welfare could be improved with a fiscal rule incorporating transfers to stabilize household consumption. This strategy noticeably dominates an aggressive monetary policy focused only on stabilizing inflation and a fiscal policy that has an excessive bias toward saving income from exports.

Keywords: commodity price boom; optimal fiscal and monetary policy; DSGE models (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E62 E63 F1 F41 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2012-10
New Economics Papers: this item is included in nep-dge, nep-ene and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ila:ilades:inv284

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