IDEAS home Printed from https://ideas.repec.org/a/bla/etrans/v16y2008i4p679-713.html
   My bibliography  Save this article

Fiscal and monetary policy in a commodity-based economy

Author

Listed:
  • Jeffrey Frankel
  • Ben Smit
  • Federico Sturzenegger

Abstract

A rough description of macroeconomic policy in South Africa would be that monetary policy concentrates on building nominal credibility through focusing on inflation, while the brunt of the responsibility for output stabilization rests on fiscal policy. This aricle discusses the convenience of such a policy mix. First, we estimate the business cycle impact of fiscal and monetary policy to find that so far fiscal policy has been mostly pro-cyclical, whereas monetary policy has been, over the last couple of years, mildly counter-cyclical. We argue that fiscal policy should be made significantly more counter-cyclical than it has been - a strategy that would deliver more macroeconomic stability and potentially higher growth. Furthermore, we believe the Central Bank has earned the credibility to operate macro policy with a more decisive output stabilization objective, and we discuss several reinterpretations of the inflation targeting regime that provide the flexibility to do so without risking the strong anti-inflationary credibility of the SARB. On exchange rate policy we recommend that the authorities take a pragmatic approach to floating, mostly allowing the currency to move freely, but intervening to avoid overvaluation. We explain why and discuss how this objective could be achieved. Copyright (c) 2008 The Authors. Journal compilation (c) 2008 The European Bank for Reconstruction and Development.

Suggested Citation

  • Jeffrey Frankel & Ben Smit & Federico Sturzenegger, 2008. "Fiscal and monetary policy in a commodity-based economy," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(4), pages 679-713, October.
  • Handle: RePEc:bla:etrans:v:16:y:2008:i:4:p:679-713
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0351.2008.00339.x
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Philippe Aghion & Diego Comin & Peter Howitt & Isabel Tecu, 2016. "When Does Domestic Savings Matter for Economic Growth?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(3), pages 381-407, August.
    2. Ricardo J Caballero & Guido Lorenzoni, 2014. "Persistent Appreciations and Overshooting: A Normative Analysis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(1), pages 1-47, April.
    3. Barry Eichengreen & David Leblang, 2003. "Exchange Rates and Cohesion: Historical Perspectives and Political-Economy Considerations," Journal of Common Market Studies, Wiley Blackwell, vol. 41(5), pages 797-822, December.
    4. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
    5. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    6. Hali J. Edison & Michael W. Klein & Luca Antonio Ricci & Torsten Sløk, 2004. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 1-2.
    7. Brender, Adi & Drazen, Allan, 2005. "Political budget cycles in new versus established democracies," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1271-1295, October.
    8. Philippe Aghion & Ioana Marinescu, 2008. "Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data?," NBER Chapters,in: NBER Macroeconomics Annual 2007, Volume 22, pages 251-278 National Bureau of Economic Research, Inc.
    9. Frankel, Jeffrey, 1995. "The Stabilizing Properties of a Nominal GNP Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 318-334, May.
    10. Levy-Yeyati, Eduardo & Sturzenegger, Federico & Gluzmann, Pablo Alfredo, 2013. "Fear of appreciation," Journal of Development Economics, Elsevier, vol. 101(C), pages 233-247.
    11. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    12. Bartolini, Leonardo & Drazen, Allan, 1997. "Capital-Account Liberalization as a Signal," American Economic Review, American Economic Association, vol. 87(1), pages 138-154, March.
    13. Devereux, Michael B & Engel, Charles M, 2006. "Expectations and Exchange Rate Policy," CEPR Discussion Papers 5743, C.E.P.R. Discussion Papers.
    14. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," Working Papers Central Bank of Chile 409, Central Bank of Chile.
    15. du Plessis, S.A., 2006. "Reconsidering the business cycle and stabilisation policies in South Africa," Economic Modelling, Elsevier, vol. 23(5), pages 761-774, September.
    16. VJeffrey A. Frankel, 2005. "Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 149-192, September.
    17. Michael P. Dooley, 1996. "A Survey of Literature on Controls over International Capital Transactions," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 639-687, December.
    18. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.
    19. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 494-513, May.
    20. Frankel, Jeffrey A., 2005. "Peg the export price index: A proposed monetary regime for small countries," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 495-508, June.
    21. Jeffrey Frankel, 2005. "Contractionary Currency Crashes In Developing Countries," CID Working Papers 117, Center for International Development at Harvard University.
    22. Ricardo Hausmann & Jason Hwang & Dani Rodrik, 2007. "What you export matters," Journal of Economic Growth, Springer, vol. 12(1), pages 1-25, March.
    23. Sebastian Edwards, 2000. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 197-246 National Bureau of Economic Research, Inc.
    24. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346.
    25. Hausmann, Ricardo & Panizza, Ugo & Rigobon, Roberto, 2006. "The long-run volatility puzzle of the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 93-124, February.
    26. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
    27. Jan A. Swanepoel, 2004. "The Monetary-Fiscal Policy Mix In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(4), pages 730-758, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pranjul Bhandari & Jeffrey Frankel, 2014. "The Best of Rules and Discretion: A Case for Nominal GDP Targeting in India," CID Working Papers 284, Center for International Development at Harvard University.
    2. Victor D. Lledó & Irene Yackovlev & Lucie Gadenne, 2011. "A Tale of Cyclicality, Aid Flows and Debt: Government Spending in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 20(5), pages 823-849, November.
    3. repec:eee:rujoec:v:1:y:2015:i:3:p:217-239 is not listed on IDEAS
    4. Jeffrey Frankel, 2014. "Nominal GDP Targeting for Middle-Income Countries," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 14(3), pages 1-14.
    5. Carmen M. Reinhart & Vincent R. Reinhart, 2009. "Bonanzas de flujos de capital: una mirada que abarca el pasado y el presente," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 27(59), pages 188-250, June.
    6. Bhandari, Pranjul & Frankel, Jeffrey, 2017. "Nominal GDP targeting for developing countries," Research in Economics, Elsevier, vol. 71(3), pages 491-506.
    7. Frankel, Jeffrey A., 2011. "How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?," Scholarly Articles 4735392, Harvard Kennedy School of Government.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:etrans:v:16:y:2008:i:4:p:679-713. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/ebrdduk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.