Commodity Price Shocks and Imperfectly Credible Macroeconomic Policies in Commodity-Exporting Small Open Economies

Juan Medina and Claudia Soto

No 2014/033, IMF Working Papers from International Monetary Fund

Abstract: In this paper, we analyze how lack of credibility and transparency of monetary and fiscal policies undermines the effectiveness of macroeconomic policies to isolate the economy from commodity price fluctuations. We develop a general equilibrium model for a commodity-exporting economy where macro policies are conducted through rules. We show that the responses of output, aggregate demand, and inflation to an increase in commodity price are magnified when these rules are imperfectly credible and lack transparency. If policies are imperfectly credible, then transparency helps private agents to learn the systematic behavior of the autorities, reducing the effects of commodity prices shocks. Coherent with the model, we show cross-country evidence that monetary policy transparency and fiscal credibility reduce the incidence of export price volatility on output volatility. Also, our results indicate that having an explicit fiscal rule and an inflation targeting regime contribute to isolate the economy from terms of trade fluctuations.

Keywords: WP; monetary policy; windowtext 0.1pt; interest rate; price index; Commodity prices; fiscal policy; imperfect credibility; monetary policy credibility; commodity price growth; monetary policy transparency; commodity price movement; commodity export; fiscal policy transparency; monetary policy rule; exported commodity price of the country; exported commodities increase; covariance terms; incidence of commodity-price shock; commodity price booms; Commodity price shocks; Commodity price fluctuations; Inflation; Consumption (search for similar items in EconPapers)
Pages: 43
Date: 2014-02-13
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Citations: View citations in EconPapers (8)

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