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Monetary Policy in Oil Exporting Countries with Fixed Exchange Rate and Open Capital Account: Expectations Matter

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  • Omar Chafik

    (Bank Al-Maghrib)

Abstract

This paper shows that for UAE, an oil exporting country with pegged exchange rate and open capital account, adjusting nominal interest rate only to foreign rate could be economically inconsistent. By incorporating a market-expected exchange rate mechanism in a semi-structural New Keynesian Model, this paper highlights the role of oil prices and expectations for shocks transmission and underlines the relatively over-valuated UAE policy exchange rate between 2010 and 2019. The assessment of NIR shows that this over-valuation was not completely compensated, and in average the monetary policy was too accommodative than it had to be.

Suggested Citation

  • Omar Chafik, 2023. "Monetary Policy in Oil Exporting Countries with Fixed Exchange Rate and Open Capital Account: Expectations Matter," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 19(1), pages 1-22, March.
    • Handle: RePEc:spr:jbuscr:v:19:y:2023:i:1:d:10.1007_s41549-022-00073-x
    DOI: 10.1007/s41549-022-00073-x
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    Cited by:

    1. Hossein Tavakolian & Hamed Ghiaie, 2019. "Optimal Inflation Targeting in a Dual-Exchange Rate Oil Economy," THEMA Working Papers 2019-09, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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    More about this item

    Keywords

    Monetary policy; Exchange rate; New Keynesian model; UIP condition; Bayesian estimation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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