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How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?

  • Frankel, Jeffrey A.

Fiscal and monetary policy each has a role to play in mitigating the volatility that stems from the large trade shocks hitting commodity-exporting countries. All too often macroeconomic policy is procyclical, that is, destabilizing, rather than countercyclical. This paper suggests two institutional innovations designed to achieve greater countercyclicality, one for fiscal policy and one for monetary policy. The proposal for fiscal policy is to emulate Chile’s structural budget rule, and particularly its avoidance of over-optimism in forecasting. The proposal for monetary policy is called Product Price Targeting (PPT), an alternative to CPI-targeting that is designed to be more robust with respect to terms of trade shocks.

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File URL: http://dash.harvard.edu/bitstream/handle/1/4735392/RWP11-015_Frankel.pdf
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Paper provided by Harvard Kennedy School of Government in its series Scholarly Articles with number 4735392.

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Date of creation: 2011
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Publication status: Published in HKS Faculty Research Working Paper Series
Handle: RePEc:hrv:hksfac:4735392
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