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Constraints on the Design and Implementation of Monetary Policy in Oil Economies: The Case of Venezuela

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Author Info
Víctor Olivo
Mercedes da Costa

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Abstract

By definition, fiscal dominance impedes the effective implementation of any monetary strategy aimed at controlling inflation. Economies that exhibit oil dominance-a situation in which oil exports largely affect the main macroeconomic indicators-may also exhibit fiscal dominance. However, in this case, the standard indicators used to gauge the presence of fiscal dominance may fail to give the appropriate signals. The main purpose of this paper is twofold: i) to present a simple framework to analyze fiscal dominance in oil exporting countries and ii) to test the hypothesis of the presence of oil dominance/fiscal dominance (OD/FD) in the case of Venezuela. Using VAR and VEC models it is possible to conclude that there is relevant evidence supporting the validity of the OD/FD hypothesis.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/142.

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Length: 47 pages
Date of creation: 12 Jun 2008
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Handle: RePEc:imf:imfwpa:08/142

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Keywords: Venezuela; Republica Bolivariana de ; Oil exporting countries ; Oil exports ; Monetary policy ; Fiscal policy ;

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  1. Steven Barnett & Rolando Ossowski, 2002. "Operational Aspects of Fiscal Policy in Oil-Producing Countries," IMF Working Papers 02/177, International Monetary Fund. [Downloadable!]
  2. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany. [Downloadable!]
  3. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May. [Downloadable!] (restricted)
  4. Mercedes da Costa & V. Hugo Juan-Ramon, 2006. "The Net Worth Approach to Fiscal Analysis: Dynamics and Rules," IMF Working Papers 06/17, International Monetary Fund. [Downloadable!]
  5. Pierpaolo Benigno & Michael Woodford, 2004. "Optimal monetary and fiscal policy: a linear-quadratic approach," International Finance Discussion Papers 806, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Bennett T. McCallum & Edward Nelson, 2004. "Targeting vs. instrument rules for monetary policy," Working Papers 2004-011, Federal Reserve Bank of St. Louis. [Downloadable!]
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  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  8. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June. [Downloadable!] (restricted)
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  9. Christopher P. Ball & Javier Reyes, 2004. "Inflation targeting or fear of floating in disguise: the case of Mexico," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 49-69. [Downloadable!]
  10. Pierre-Richard Agénor, 2001. "Monetary Policy Under Flexible Exchange Rates: an Introduction to Inflation Targeting," Working Papers Central Bank of Chile 124, Central Bank of Chile. [Downloadable!]
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  11. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January. [Downloadable!] (restricted)
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  12. Victor Olivo & Stephen M. Miller, 2000. "The Long-Run Relationship between Money, Nominal GDP, and the Price Level in Venezuela: 1950 to 1996," Working papers 2000-05, University of Connecticut, Department of Economics. [Downloadable!]
  13. Alina Carare & Andrea Schaechter & Mark R. Stone & Marc Zelmer, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 02/102, International Monetary Fund. [Downloadable!]
  14. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Jarkko Soikkeli, 2002. "The Inflation Targeting Framework in Norway," IMF Working Papers 02/184, International Monetary Fund. [Downloadable!]
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