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Yemen

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  • 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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    Keywords: Exchange rates; Adjustment process; Oil; Oil exports; exchange rate; real exchange rate; oil production; effective exchange rate; real effective exchange rate; equilibrium exchange rate; exchange rate regime; foreign exchange; crude oil; nominal exchange rate; exchange rate depreciation; oil prices; effective exchange rates; real exchange rates; floating exchange rate; real effective exchange rates; exchange rate band; exchange rate policy; exchange reserves; exchange auctions; econometric results; foreign exchange reserves; oil reserves; exchange rate developments; exchange rate flexibility; exchange rate management; flexible exchange rate; exchange earnings; freely floating exchange rate; daily exchange rate; floating exchange rate regime; oil revenues; capital flows; foreign exchange earnings; crude oil prices; flexible exchange rate regime; exchange rate stability; foreign exchange auctions; oil sector; exchange rate determination; exchange rate bands; econometric analysis; oil discoveries; foreign investment; million barrels; natural gas; oil markets; fixed exchange rate; exchange rate adjustment; exchange rate regimes; exchange rate instability; limited exchange rate flexibility; international oil prices; exchange rate variability; foreign exchange market; real exchange rate depreciation; exchange rate pass; exchange rate anchor; real exchange rate path; exchange rate path; loss of oil production; crude oil price; higher oil prices; natural resources; oil price fluctuations;

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    1. Ronald MacDonald & Luca Antonio Ricci, 2003. "Estimation of the Equilibrium Real Exchange Rate for South Africa," IMF Working Papers 03/44, International Monetary Fund.
    2. Ronald MacDonald, 1995. "Long-Run Exchange Rate Modeling," IMF Working Papers 95/14, International Monetary Fund.
    3. Taline Koranchelian, 2005. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country," IMF Working Papers 05/135, International Monetary Fund.
    4. Ronald Macdonald, 1995. "Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 437-489, September.
    5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    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. 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.
    8. International Monetary Fund, 2003. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country," IMF Working Papers 03/93, International Monetary Fund.
    9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
    10. Joannes Mongardini, 1998. "Estimating Egypt's Equilibrium Real Exchange Rate," IMF Working Papers 98/5, International Monetary Fund.
    11. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper," IMF Working Papers 02/223, International Monetary Fund.
    12. Claudio Paiva, 2001. "Competitiveness and the Equilibrium Exchange Rate in Costa Rica," IMF Working Papers 01/23, International Monetary Fund.
    13. 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.
    14. 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.
    15. Mohsin S. Khan & Ehsan U. Choudhri, 2004. "Real Exchange Rates in Developing Countries," IMF Working Papers 04/188, International Monetary Fund.
    16. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
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    Cited by:
    1. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2008. "Do Terms of Trade Drive Real Exchange Rates? Comparing Oil and Commodity Currencies," Working Papers 2008-32, CEPII research center.

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