Fiscal Stress and Monetary Policy Stance in Oil-Exporting Countries
Hao Jin () and
Chen Xiong ()
No 2020-006, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington
We documented that for some oil-exporting countries, the correlation between exchange rates and oil prices is strongly negative during periods of significant oil price drop but is much weaker during other periods. To interpret this time-varying asymmetric correlation, we develop and estimate a Markov-switching small open economy New Keynesian model with oil income as a source of government revenue. In particular, we allow monetary and fiscal policy coefficients to switch across "active" and "passive" regimes. Using data on Russia, our result shows that the policy combinations fluctuate. We find that active monetary policy isolates the exchange rate from oil price variations but changes to passively tolerate depreciation and inflation to support government debt when oil price drops place fiscal policy in a state of stress. Counterfactual policy experiments suggest policy regime switching is crucial to account for the observed asymmetric impact of oil prices on the exchange rate and that the trans-mission channels of oil price shocks differ significantly across policy regimes.
Keywords: Fiscal Policy; Monetary Policy; Exchange Rate; Oil Price (search for similar items in EconPapers)
JEL-codes: E52 E63 F41 Q43 (search for similar items in EconPapers)
Pages: 41 pages
New Economics Papers: this item is included in nep-cba, nep-cis, nep-dge, nep-ene, nep-mac, nep-mon and nep-opm
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Journal Article: Fiscal stress and monetary policy stance in oil-exporting countries (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2020006
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