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Monetary Policy in Resource-Rich Developing Economies

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  • Ruslan Aliyev

Abstract

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.

Suggested Citation

  • Ruslan Aliyev, 2012. "Monetary Policy in Resource-Rich Developing Economies," CERGE-EI Working Papers wp466, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp466
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Huseynov, Salman & Ahmadov, Vugar, 2014. "Azərbaycan üzrə DSÜT modeli: qiymətləndirmə və proqnozlaşdırma
      [A DSGE model for Azerbaijan: estimation and forecasting]
      ," MPRA Paper 78123, University Library of Munich, Germany.
    2. Ruslan Aliyev, 2014. "Determinants of the Choice of Exchange Rate Regime in Resource-Rich Countries," CERGE-EI Working Papers wp527, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

    More about this item

    Keywords

    monetary policy; Dutch disease; resource-rich countries; macroeconomic stabilization;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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