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Monetary Policy in an Economy Sick with Dutch Disease

Author

Listed:
  • Kirill Sosunov

    (Higher School of Economics)

  • Oleg Zamulin

    (New Economic School)

Abstract

The paper studies monetary policy in an economy, in which the manufacturing sector is ousted completely by the presence of a large natural resource industry. Thus, the economy produces only non-tradable goods, which can complement or substitute imported goods, and the primary shock to the economy comes from the fluctuations in the world price of the exported commodity. A model of such an economy is calibrated using parameters relevant for Russia, which is an example of an economy sick with Dutch Disease, and several conventional policy rules are considered. It is shown that in absence of a well-functioning fiscal stabilization fund, it may be optimal for monetary authorities to respond to the real exchange rate, as the Bank of Russia allegedly does, using purchases of foreign reserves as the policy instrument. The logic of these actions is to replace the absent fiscal stabilization policy. In case monetary policy is conducted using an interest rate instrument, there should be no reaction to the real exchange rate and only slight one - to inflation.

Suggested Citation

  • Kirill Sosunov & Oleg Zamulin, 2007. "Monetary Policy in an Economy Sick with Dutch Disease," Working Papers w0101, Center for Economic and Financial Research (CEFIR).
  • Handle: RePEc:cfr:cefirw:w0101
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    File URL: http://www.cefir.ru/papers/WP101.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Dutch disease; Monetary Policy; Russia;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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