IDEAS home Printed from https://ideas.repec.org/p/erg/wpaper/844.html
   My bibliography  Save this paper

Labor Market Heterogeneity and Optimal Exchange Rate Regime in Resource-Rich MENA Countries

Author

Listed:
  • Almukhtar Saif Al-Abri

    () (Sultan Qaboos University)

Abstract

Although countries of the MENA region are commonly considered as primary-commodity economies, they show sharp dissimilarities in a number of dimensions. Two important dimensions are the size of resource endowments and the degree of labor market flexibility. Countries such as members of the Gulf Cooperation Council (GCC) and Libya are highly oilendowed economies with largely flexible labor markets and substantial remittances outflows. While the rest of the MENA countries, such as Egypt, Sudan, Yemen, Algeria, Iran and Iraq, show commonalities in terms of their relatively smaller oil-endowments and the lack of labor market flexibility. This paper attempts to incorporate the role of labor market flexibility in a unified theoretical framework of optimal exchange rate policies. For that purpose, the paper extends the standard rules-vs.-discretion model of monetary policy to allow for different assumptions about wage rigidities. The analysis suggests that when all prices are exogenous and wages are all optimally indexed to inflation (i.e., labor market flexibility), fixed exchange rate regimes deliver more desirable outcomes in terms of real output, inflation, and insulation against external shocks compared to flexible exchange rate regimes. On the other hand, the fixity of exchange rates combined with rigid goods and labor markets can add to real appreciations.

Suggested Citation

  • Almukhtar Saif Al-Abri, 2014. "Labor Market Heterogeneity and Optimal Exchange Rate Regime in Resource-Rich MENA Countries," Working Papers 844, Economic Research Forum, revised Oct 2014.
  • Handle: RePEc:erg:wpaper:844
    as

    Download full text from publisher

    File URL: http://erf.org.eg/wp-content/uploads/2015/12/844.pdf
    Download Restriction: no

    File URL: http://bit.ly/2mWp4sl
    Download Restriction: no

    References listed on IDEAS

    as
    1. Tas, Bedri Kamil Onur & Togay, Selahattin, 2010. "Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq," Economic Modelling, Elsevier, vol. 27(5), pages 1324-1336, September.
    2. Levy Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2010. "On the endogeneity of exchange rate regimes," European Economic Review, Elsevier, vol. 54(5), pages 659-677, July.
    3. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 765-783.
    4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    5. Sebastian Edwards, 1996. "The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes," NBER Working Papers 5756, National Bureau of Economic Research, Inc.
    6. Charles Engel, 2011. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," American Economic Review, American Economic Association, vol. 101(6), pages 2796-2822, October.
    7. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
    8. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    9. Tanzi, Vito & Zee, Howell H., 2000. "Tax Policy for Emerging Markets: Developing Countries," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(2), pages 299-322, June.
    10. Berger, Helge & Jensen, Henrik & Schjelderup, Guttorm, 2001. "To peg or not to peg?: A simple model of exchange rate regime choice in small economies," Economics Letters, Elsevier, vol. 73(2), pages 161-167, November.
    11. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    12. Joshua Aizenman & Reuven Glick, 2008. "Pegged Exchange Rate Regimes-A Trap?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 817-835, June.
    13. Frankel, Jeffrey A., 2010. "The Natural Resource Curse: A Survey," Scholarly Articles 4454156, Harvard Kennedy School of Government.
    14. Svensson, Lars E. O. & Woodford, Michael, 2004. "Indicator variables for optimal policy under asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 661-690, January.
    15. Wai‐Mun Chia & Tianyin Cheng & Mengling Li, 2012. "Exogenous Shocks and Exchange Rate Regimes," The World Economy, Wiley Blackwell, vol. 35(4), pages 444-460, April.
    16. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2011. "Does Euro or Dollar Pegging Impact the Real Exchange Rate? The Case of Oil and Commodity Currencies," The World Economy, Wiley Blackwell, vol. 34(9), pages 1557-1592, September.
    17. Eichengreen, Barry, 1999. "Kicking the Habit: Moving from Pegged Rates to Greater Exchange Rate Flexibility," Economic Journal, Royal Economic Society, vol. 109(454), pages 1-14, March.
    18. Frankel, Jeffrey A., 2005. "Peg the export price index: A proposed monetary regime for small countries," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 495-508, June.
    19. George Naufal & Carlos Vargas-Silva, 2010. "Migrant transfers in the MENA region: A two way street in which traffic is changing," Migration Letters, Transnational Press London, UK, vol. 7(2), pages 168-178, October.
    20. Brad Setser, 2007. "The Case for Exchange Rate Flexibility in Oil-Exporting Economies," Policy Briefs PB07-8, Peterson Institute for International Economics.
    21. Al-Abri, Almukhtar Saif, 2014. "Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective," Economic Modelling, Elsevier, vol. 36(C), pages 88-98.
    22. Ghanem Darine, 2012. "Fixed Exchange Rate Regimes and Inflation Performance: Evidence from MENA Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 8(1), pages 1-30, August.
    23. Yousefi, Ayoub & Wirjanto, Tony S., 2003. "Exchange rate of the US dollar and the J curve: the case of oil exporting countries," Energy Economics, Elsevier, vol. 25(6), pages 741-765, November.
    24. Jay, Squalli, 2011. "Is the dollar peg suitable for the largest economies of the Gulf Cooperation Council?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 496-512, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:erg:wpaper:844. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sherine Ghoneim). General contact details of provider: http://edirc.repec.org/data/erfaceg.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.