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Yemen: Exchange Rate Policy in the Face of Dwindling Oil Exports

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Author Info

  • Todd Schneider
  • Nabil Ben Ltaifa
  • Faisal Ahmed
  • Saade Chami
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    Abstract

    This paper investigates the likely implications of declining oil production on Yemen's equilibrium exchange rate, and discusses policy options to ensure a smooth transition to a nonoil economy. The empirical results suggest that, as oil production and foreign exchange earnings fall, the Yemeni rial will have to adjust downward in real effective terms to keep pace with the equilibrium exchange rate. In light of strong pass-through from exchange rate depreciation to domestic inflation, this could entail a substantial depreciation in nominal terms. Given the nature of the adjustment, a floating exchange rate regime appears to be the best option, if supported by appropriate macroeconomic policies. However, given public fixation on a exchange rate stability, a softly managed float would be a better option for Yemen whereby the central bank may have to lead the market toward the equilibrium exchange rate.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/5.

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    Length: 22
    Date of creation: 01 Jan 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/5

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    Related research

    Keywords: Exchange rates; Adjustment process; Oil; Oil exports;

    This paper has been announced in the following NEP Reports:

    References

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    1. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
    2. Ronald MacDonald, 1995. "Long-Run Exchange Rate Modeling - A Survey of the Recent Evidence," IMF Working Papers 95/14, International Monetary Fund.
    3. Ehsan U. Choudhri & Mohsin S. Khan, 2005. "Real Exchange Rates in Developing Countries: Are Balassa-Samuelson Effects Present?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 2.
    4. Khan, Mohsin S. & Ostry, Jonathan D., 1992. "Response of the equilibrium real exchange rate to real disturbances in developing countries," World Development, Elsevier, vol. 20(9), pages 1325-1334, September.
    5. Joannes Mongardini, 1998. "Estimating Egypt's Equilibrium Real Exchange Rate," IMF Working Papers 98/5, International Monetary Fund.
    6. Giavazzi, Francesco & Sheen, Jeff R & Wyplosz, Charles, 1988. "The Real Exchange Rate and the Fiscal Aspects of a Natural Resource Discovery," Oxford Economic Papers, Oxford University Press, vol. 40(3), pages 427-50, September.
    7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    8. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper: In Search of Commodity Currencies," IMF Working Papers 02/223, International Monetary Fund.
    9. Ronald MacDonald & Luca Antonio Ricci, 2003. "Estimation of the Equilibrium Real Exchange Rate for South Africa," IMF Working Papers 03/44, International Monetary Fund.
    10. Taline Koranchelian, 2005. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country: Algeria's Experience," IMF Working Papers 05/135, International Monetary Fund.
    11. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    12. Serven, Luis & Solimano, Andres, 1992. "Private Investment and Macroeconomic Adjustment: A Survey," World Bank Research Observer, World Bank Group, vol. 7(1), pages 95-114, January.
    13. repec:imf:imfwpa:92/20 is not listed on IDEAS
    14. Claudio Paiva, 2001. "Competitiveness and the Equilibrium Exchange Rate in Costa Rica," IMF Working Papers 01/23, International Monetary Fund.
    15. International Monetary Fund, 2003. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country: The Case of Russia," IMF Working Papers 03/93, International Monetary Fund.
    16. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
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    Cited by:
    1. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2011. "Does Euro or Dollar Pegging Impact the Real Exchange Rate? The Case of Oil and Commodity Currencies," The World Economy, Wiley Blackwell, vol. 34(9), pages 1557-1592, 09.

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