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Fiscal and monetary policy in a commodity-based economy

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  • 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
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    References listed on IDEAS

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    2. Hausmann, Ricardo & Rodrik, Dani, 2003. "Economic development as self-discovery," Journal of Development Economics, Elsevier, pages 603-633.
    3. Jaffe, Adam B, 1986. "Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value," American Economic Review, American Economic Association, vol. 76(5), pages 984-1001, December.
    4. Ricardo Hausmann & Jason Hwang & Dani Rodrik, 2007. "What you export matters," Journal of Economic Growth, Springer, vol. 12(1), pages 1-25, March.
    5. Kenneth J. Arrow, 1962. "The Economic Implications of Learning by Doing," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 155-173.
    6. Ricardo Hausmann & Bailey Klinger, 2006. "Structural Transformation and Patterns of Comparative Advantage in the Product Space," CID Working Papers 128, Center for International Development at Harvard University.
    7. David de Ferranti & Guillermo E. Perry & Daniel Lederman & William E. Maloney, 2002. "From Natural Resources to the Knowledge Economy : Trade and Job Quality," World Bank Publications, The World Bank, number 14040.
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    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. 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.
    3. Frankel, Jeffrey A., 2011. "How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?," Scholarly Articles 4735392, Harvard Kennedy School of Government.
    4. 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.
    5. repec:eee:reecon:v:71:y:2017:i:3:p:491-506 is not listed on IDEAS
    6. repec:eee:rujoec:v:1:y:2015:i:3:p:217-239 is not listed on IDEAS
    7. Bhandari, Pranjul & Frankel, Jeffrey, 2017. "Nominal GDP targeting for developing countries," Research in Economics, Elsevier, pages 491-506.
    8. 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.

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