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The Case for Exchange Rate Flexibility in Oil-Exporting Economies

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  • Brad Setser

    (Council on Foreign Relations)

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    Abstract

    High oil prices are again transforming oil-exporting countries. With oil trading at $90 a barrel, government coffers in these countries are overflowing with the oil windfall, and stock markets there are booming. However, one feature of these oil exporters has not changed: their propensity to peg to the dollar. Large oil-exporting economies that border the Persian Gulf peg to the dollar even more tightly than China does while some others peg to a basket of currencies of oil-importing countries--mainly the dollar and the euro. These economies are making a policy mistake. They would be better served by a currency regime that assures their currencies depreciate when the price of oil falls and appreciate when the price of oil rises. Those that lack the institutions to conduct an autonomous monetary policy should peg to a basket that includes the price of oil. Exchange rate flexibility would reduce the need for domestic prices in the oil-exporting economies to rise and fall along with the price of oil, create additional room for monetary policy to reflect domestic conditions, and help oil-exporting economies manage the large swings in government revenue that accompany large swings in the oil price. The time has come to decouple the currencies of large oil-exporting economies from the dollar.

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    Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB07-8.

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    Date of creation: Nov 2007
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    Handle: RePEc:iie:pbrief:pb07-8

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    Cited by:
    1. Al-Abri, Almukhtar Saif, 2014. "Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective," Economic Modelling, Elsevier, Elsevier, vol. 36(C), pages 88-98.
    2. Hermann Remsperger & Adalbert Winkler, 2009. "Welchen Einfluss hat der Wechselkurs auf die internationale Rolle von US-Dollar und Euro?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, Verein für Socialpolitik, vol. 10(1), pages 21-38, 02.
    3. Aaditya Mattoo & Arvind Subramanian, 2009. "Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 32(8), pages 1135-1164, 08.
    4. Tas, Bedri Kamil Onur & Togay, Selahattin, 2010. "Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq," Economic Modelling, Elsevier, Elsevier, vol. 27(5), pages 1324-1336, September.

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