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Monetary Policy in an Economy Sick with Dutch Disease

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Author Info

  • Kirill Sosunov

    (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 Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0101.

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Length: 28 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:cfr:cefirw:w0101

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Keywords: Dutch disease; Monetary Policy; Russia;

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References

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  1. Philippe Aghion & Philippe Bacchetta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Working Papers 06.02, Swiss National Bank, Study Center Gerzensee.
  2. 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.
  3. Eric Parrado, 2004. "Inflation Targeting and Exchange Rate Rules in an Open Economy," IMF Working Papers 04/21, International Monetary Fund.
  4. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
  5. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  6. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-61, December.
  7. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
  8. 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.
  9. Carlos A. Végh Gramont & Guillermo Calvo & Carmen Reinhart, 1994. "Targeting the Real Exchange Rate: Theory and Evidence," IMF Working Papers 94/22, International Monetary Fund.
  10. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  11. Martin Uribe, 1995. "Real exchange rate targeting and macroeconomic instability," International Finance Discussion Papers 505, Board of Governors of the Federal Reserve System (U.S.).
  12. repec:fth:harver:1435 is not listed on IDEAS
  13. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 1995-97, Tilburg University, Center for Economic Research.
  14. 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.
  15. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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  17. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  18. 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.
  19. 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.
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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. Mohamed Tahar Benkhodja, 2011. "Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy," Working Papers 1134, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Somayeh Mardaneh, 2012. "Inflation Dynamics in a Dutch Disease Economy," Discussion Papers in Economics 12/25, Department of Economics, University of Leicester.
  3. Hasanov, Fakhri, 2009. "Analyzing price level in a booming economy: the case of Azerbaijan," MPRA Paper 29555, University Library of Munich, Germany.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.

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