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A Proposal to Anchor Monetary Policy by the Price of the Export Commodity




The debate over monetary standards and exchange rate regimes for developing countries is as wide open as ever. On the one hand, the big selling points of floating exchange rates-monetary independence and accommodation of terms of trade shocks-have not lived up to their promise. On the other hand, proposals for credible institutional monetary commitments to nominal anchors have each run aground on their own peculiar shoals. Rigid pegs to the dollar, for example, are dangerous when the dollar appreciates relative to other export markets. This study explores a new proposal that countries specialized in the export of a particular commodity should peg their currency to that commodity. When the dollar price of the commodity on world markets falls, the dollar exchange rate of the local currency would fall in tandem. The country would reap the best of both worlds: the advantage of a nominal anchor for monetary policy, together with the automatic accommodation to terms of trade shocks that floating rates claim to deliver. We conduct a set of counter-factual experiments. For each of a list of countries specialized in particular mineral or agricultural commodities, what would have happened, over the last 30 years, if it had pegged its currency to that commodity, as compared to pegging to the dollar, yen, or mark, or as compared to whatever exchange rate policy it actually followed historically? We compute under these scenarios the price of the commodity in local terms, and we then simulate the implications for exports. Illustrative of the results is that some victims of financial difficulties in the late 1990s might have achieved a stimulus to exports precisely when it was most needed, without having to go through wrenching currency collapses, if they had been on regimes of pegging to their export commodity: South Africa to gold or platinum, Nigeria and Indonesia to oil, Chile to copper, Argentina to wheat, Colombia to coffee, and so on

Suggested Citation

  • Frankel, Jeffrey & Saiki, Ayako, 2002. "A Proposal to Anchor Monetary Policy by the Price of the Export Commodity," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 417-448.
  • Handle: RePEc:ris:integr:0202

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    References listed on IDEAS

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    Cited by:

    1. Jeffrey A. Frankel, 2003. "Experience of and Lessons from Exchange Rate Regime in Emerging Economies," NBER Working Papers 10032, National Bureau of Economic Research, Inc.
    2. Jeffrey Frankel, 2011. "A Comparison Of Product Price Targeting And Other Monetary Anchor Options, For Commodity Exporters In Latin America," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Fall 2011), pages 1-70, August.
    3. Ayako Saiki, 2005. "Asymmetric Effect of Currency Union for Developing Countries," Open Economies Review, Springer, vol. 16(3), pages 227-247, July.
    4. Frankel, Jeffrey A., 2009. "On Global Currencies," Scholarly Articles 4448879, Harvard Kennedy School of Government.
    5. Bodart, V. & Candelon, B. & Carpantier, J.-F., 2012. "Real exchanges rates in commodity producing countries: A reappraisal," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1482-1502.
    6. Tas, Bedri Kamil Onur & Togay, Selahattin, 2010. "Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq," Economic Modelling, Elsevier, vol. 27(5), pages 1324-1336, September.
    7. Saiki, Ayako & Chantapacdepong, Pornpinun & Volz, Ulrich, 2016. "Dealing with Quantitative Easing Spillovers in East Asia: The Role of Institutions and Macroprudential Policy," ADBI Working Papers 604, Asian Development Bank Institute.
    8. Frankel, Jeffrey A., 2011. "How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?," Scholarly Articles 4735392, Harvard Kennedy School of Government.
    9. Jeffrey A. Frankel, 2008. "The Effect of Monetary Policy on Real Commodity Prices," NBER Chapters,in: Asset Prices and Monetary Policy, pages 291-333 National Bureau of Economic Research, Inc.
    10. Abdelghani, Echchabi & Osman, Sayid & Isares, Mahamad & Khalid, Sorhiran & Zulhilmi, Zulkifli, 2011. "The implementation of Gulf Dinar among the GCC member countries and its possible impacts," MPRA Paper 28245, University Library of Munich, Germany.
    11. Bedri Kamil Onur Tas & Selahattin Togay, 2008. "Optimal Monetary Policy for Postwar Iraq," Working Papers 0813, TOBB University of Economics and Technology, Department of Economics.
    12. Mohsin S. Khan, 2010. "The GCC Monetary Union: Choice of Exchange Rate Regime," Chapters,in: Currency Union and Exchange Rate Issues, chapter 5 Edward Elgar Publishing.
    13. Jeffrey A. Frankel, 2017. "The Currency-Plus-Commodity Basket: A Proposal for Exchange Rates in Oil-exporting Countries to Accommodate Trade Shocks Automatically," Working Papers 1111, Economic Research Forum, revised 06 2017.
    14. Jeffrey A. Frankel, 2010. "A Comparison of Monetary Anchor Options, Including Product Price Targeting, for Commodity-Exporters in Latin America," NBER Working Papers 16362, National Bureau of Economic Research, Inc.
    15. 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.
    16. Gilles Duffrenot & Kimiko Sugimoto, 2010. "Pegging the future West African single currency in regard to internal/external competitiveness: a counterfactual analysis," William Davidson Institute Working Papers Series wp974, William Davidson Institute at the University of Michigan.

    More about this item


    Money; Nominal anchor; Peg; Terms of Trade; Agricultural Commodities; Mineral Commodities; Gold;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General


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