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Monetary Policy in an Economy Sick with Dutch Disease

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  • Kirill Sosunov

    ()
    (State University – Higher School of Economics)

  • Oleg Zamulin

    ()
    (New Economic School)

Abstract

The paper studies monetary policy in an economy, in which the manufacturing sector is ousted completely by the presence of a large natural resource industry. Thus, the economy produces only non-tradable goods, which can complement or substitute imported goods, and the primary shock to the economy comes from the fluctuations in the world price of the exported commodity. A model of such an economy is calibrated using parameters relevant for Russia, which is an example of an economy sick with Dutch Disease, and several conventional policy rules are considered. It is shown that in absence of a well-functioning fiscal stabilization fund, it may be optimal for monetary authorities to respond to the real exchange rate, as the Bank of Russia allegedly does, using purchases of foreign reserves as the policy instrument. The logic of these actions is to replace the absent fiscal stabilization policy. In case monetary policy is conducted using an interest rate instrument, there should be no reaction to the real exchange rate and only slight one – to inflation.

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Bibliographic Info

Paper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number WP13_2007_07.

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Length: 36 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:cas:wpaper:wp13_2007_07

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Related research

Keywords: Dutch disease; Monetary Policy; Russia.;

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References

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  1. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 277, Federal Reserve Bank of Minneapolis.
  2. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," CEPR Discussion Papers 5629, C.E.P.R. Discussion Papers.
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  5. repec:fth:harver:1435 is not listed on IDEAS
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  11. Esanov, Akram & Merkl, Christian & Vinhas de Souza, Lucio, 2005. "Monetary policy rules for Russia," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 484-499, September.
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  14. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
  15. Vdovichenko Anna & Voronina Victoria, 2004. "Monetary policy rules and their application in Russia," EERC Working Paper Series 04-09e, EERC Research Network, Russia and CIS.
  16. FFF1Alexander A. NNN1Weinreb, 2003. "Change and instability," Demographic Research Special Collections, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 1(12), pages 373-396, September.
  17. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
  18. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  19. Michael Bruno & Jeffrey Sachs, 1982. "Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"," NBER Working Papers 0852, National Bureau of Economic Research, Inc.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Thinking about monetary policy in Russia – a useful DSGE model?
    by Lars Christensen in The Market Monetarist on 2013-04-25 19:50:13
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Irina Khvostova & Alexander Larin & Anna Novak, 2014. "Euler equation with habits and measurement errors: estimates on Russian micro data," HSE Working papers WP BRP 52/EC/2014, National Research University Higher School of Economics.
  2. Karev, M., 2011. "Revealed Preferences of the Bank of Russia. Simulation Approach," Journal of the New Economic Association, New Economic Association, issue 9, pages 72-97.
  3. Mohamed Tahar Benkhodja, 2011. "Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy," Working Papers halshs-00654511, HAL.
  4. Ruslan Aliyev, 2012. "Monetary Policy in Resource-Rich Developing Economies," CERGE-EI Working Papers wp466, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  5. Charemza, Wojciech & Makarova, Svetlana & Prytula, Yaroslav & Raskina, Julia & Vymyatnina, Yulia, 2009. "A small forward-looking inter-country model (Belarus, Russia and Ukraine)," Economic Modelling, Elsevier, vol. 26(6), pages 1172-1183, November.
  6. Somayeh Mardaneh, 2012. "Inflation Dynamics in a Dutch Disease Economy," Discussion Papers in Economics 12/25, Department of Economics, University of Leicester.
  7. Hasanov, Fakhri, 2009. "Analyzing price level in a booming economy: the case of Azerbaijan," MPRA Paper 29555, University Library of Munich, Germany.
  8. Oxana A. Malakhovskaya & Alexey R. Minabutdinov, 2013. "Are commodity price shocks important? A Bayesian estimation of a DSGE model for Russia," HSE Working papers WP BRP 48/EC/2013, National Research University Higher School of Economics.

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