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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 - Economics 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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  3. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
  4. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor & Zoega, Gylfi, 1997. "A Mixed Blessing: Natural Resources and Economic Growth," CEPR Discussion Papers 1668, C.E.P.R. Discussion Papers.
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  7. Adam, Christopher S. & Buffie, Edward & O'Connell, Stephen & Pattillo, Catherine, 2008. "Monetary Policy Rules for Managing Aid Surges in Africa," Working Paper Series RP2008/77, World Institute for Development Economic Research (UNU-WIDER).
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  9. Emmanuel K. K. Lartey, 2008. "Capital Inflows, Dutch Disease Effects, and Monetary Policy in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 971-989, November.
  10. Frederick van der Ploeg & Anthony J. Venables, 2011. "Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies," Economic Journal, Royal Economic Society, vol. 121(551), pages 1-30, March.
  11. Pablo A. Acosta & Emmanuel K. K. Lartey & Federico S. Mandelman, 2007. "Remittances and the Dutch disease," FRB Atlanta Working Paper 2007-08, Federal Reserve Bank of Atlanta.
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  13. International Monetary Fund, 2008. "Constraints on the Design and Implementation of Monetary Policy in Oil Economies; The Case of Venezuela," IMF Working Papers 08/142, International Monetary Fund.
  14. International Monetary Fund, 2008. "Impact of Government Expenditure on Growth; The Case of Azerbaijan," IMF Working Papers 08/115, International Monetary Fund.
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  16. Juan Pablo Medina Guzman & Ruy Lama, 2010. "Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?," IMF Working Papers 10/182, International Monetary Fund.
  17. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, March.
  18. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
  19. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
  20. Kirill Sosunov & Oleg Zamulin, 2007. "Monetary Policy in an Economy Sick with Dutch Disease," Working Papers w0101, Center for Economic and Financial Research (CEFIR).
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