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Monetary Policy in Resource-Rich Developing Economies

  • Ruslan Aliyev

The economic literature acknowledges that to avoid the resource curse, resource- rich countries should restrict fiscal expansion and save a significant part of resource revenues outside the domestic economy. However, in these countries governments tend to ineffectively spend a considerable part of windfall revenues in the short run. In this research I construct a DSGE model for a small, open economy to show that if fiscal indiscipline in the form of immediate responses to foreign resource revenue changes is inevitable, then monetary policy can help improve the allocation problem. The simulation results indicate that targeting the exchange rate or price level through foreign exchange interventions by the central bank can soften the negative effects of Dutch Disease and stabilize the economy in the face of volatile natural resource revenues in the short run. I also find that a fixed exchange rate regime outperforms price level targeting by delivering higher isolation and hence less vulnerability to shocks in natural resource revenues. In contrast, if the central bank chooses to pursue a laissez faire policy, i.e., not to intervene, then the economy becomes vulnerable to shocks in foreign resource revenues and the resource curse becomes more severe.

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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp466.

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Date of creation: Aug 2012
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Handle: RePEc:cer:papers:wp466
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  1. Edward F. Buffie & Stephen A. O'Connell & Catherine A. Pattillo & Christopher Adam, 2007. "Monetary Policy Rules for Managing Aid Surges in Africa," IMF Working Papers 07/180, International Monetary Fund.
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  12. Juan Pablo Medina Guzman & Ruy Lama, 2010. "Is Exchange Rate Stabilization a+L4510n Appropriate Cure for the Dutch Disease?," IMF Working Papers 10/182, International Monetary Fund.
  13. International Monetary Fund, 2008. "Constraintson the Design and Implementation of Monetary Policy in Oil Economies; The Case of Venezuela," IMF Working Papers 08/142, International Monetary Fund.
  14. Thierry Tressel & Alessandro Prati, 2006. "Aid Volatility and Dutch Disease; Is there a Role for Macroeconomic Policies?," IMF Working Papers 06/145, International Monetary Fund.
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  16. Ilkin Aliyev, 2012. "Is Fiscal Policy Procyclical in Resource-Rich Countries?," CERGE-EI Working Papers wp464, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  17. Kamilya Tazhibayeva & Aasim M. Husain & Anna Ter-Martirosyan, 2008. "Fiscal Policy and Economic Cycles in Oil-Exporting Countries," IMF Working Papers 08/253, International Monetary Fund.
  18. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, number 9780198774099.
  19. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
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