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Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective

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  • Al-Abri, Almukhtar Saif

Abstract

This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare.

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  • Al-Abri, Almukhtar Saif, 2014. "Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective," Economic Modelling, Elsevier, vol. 36(C), pages 88-98.
    • Handle: RePEc:eee:ecmode:v:36:y:2014:i:c:p:88-98
    DOI: 10.1016/j.econmod.2013.09.016
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    Cited by:

    1. An, Haizhong & Zhong, Weiqiong & Chen, Yurong & Li, Huajiao & Gao, Xiangyun, 2014. "Features and evolution of international crude oil trade relationships: A trading-based network analysis," Energy, Elsevier, vol. 74(C), pages 254-259.
    2. Abbas Ali Abounoori & Rafik Nazarian & Ashkan Amiri, 2014. "Oil Price Pass-Through into Domestic Inflation: The Case of Iran," International Journal of Energy Economics and Policy, Econjournals, vol. 4(4), pages 662-669.
    3. Eman Elish, 2019. "The Determinants of Optimal Exchange Rate Regimes in High and Low Oil-Producing Countries," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 15(2), pages 97-120, December.
    4. Almukhtar Saif Al-Abri, 2014. "Labor Market Heterogeneity and Optimal Exchange Rate Regime in Resource-Rich MENA Countries," Working Papers 844, Economic Research Forum, revised Oct 2014.
    5. Choi, Yoonho & Choi, E. Kwan, 2018. "Unemployment and optimal exchange rate in an open economy," Economic Modelling, Elsevier, vol. 69(C), pages 82-90.

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    More about this item

    Keywords

    Oil-exporting countries; Exchange rate regimes; New Keynesian Small Open Economy model; Welfare analysis; Primary-commodity economy;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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