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Monetary Rules for Commodity Traders

  • Luis Cat�o
  • Roberto Chang

The paper develops a model of a small economy that trades commodities whose world prices fluctuate exogenously, and studies its implications for monetary policy. It derives analytical characterizations of optimal Ramsey and flexible price allocations under both perfect risk sharing and financial autarky. This allows the paper to identify the crucial roles of production structure, price elasticities, and capital mobility in monetary policy evaluation. In a calibrated example, impulse-responses under PPI targeting track flexible price allocations closely, but can diverge greatly from Ramsey allocations when risk sharing is perfect and intratemporal elasticities are high. In those cases, policy rules that stabilize real exchange rates more than PPI targeting can deliver higher welfare. But PPI targeting is a clear winner under portfolio autarky.

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Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 61 (2013)
Issue (Month): 1 (April)
Pages: 52-91

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Handle: RePEc:pal:imfecr:v:61:y:2013:i:1:p:52-91
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  1. Faia, Ester & Monacelli, Tommaso, 2006. "Optimal Monetary Policy in a Small Open Economy with Home Bias," CEPR Discussion Papers 5522, C.E.P.R. Discussion Papers.
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