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Optimal monetary and exchange rate frameworks for commodity-exposed economies

Author

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  • Drechsel, Thomas
  • McLeay, Michael
  • Tenreyro, Silvana
  • Turri, Enrico

Abstract

We show that the optimal monetary and exchange rate frameworks depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions depend on the commodity cycle. Stabilizing domestic prices is optimal for commodity exporters, in line with standard open-economy policy prescriptions. But when economies import commodities as production inputs, optimal policy largely ‘looks through’ their direct and indirect effects on domestic prices. In emerging economies, where financial conditions are closely related to commodity cycles, trade-offs are starker and limited credibility may make implementing optimal policy challenging.

Suggested Citation

  • Drechsel, Thomas & McLeay, Michael & Tenreyro, Silvana & Turri, Enrico, 2026. "Optimal monetary and exchange rate frameworks for commodity-exposed economies," LSE Research Online Documents on Economics 140771, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:140771
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    File URL: https://researchonline.lse.ac.uk/id/eprint/140771/
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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