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The Case for Exchange Rate Flexibility in Oil-Exporting Economies

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  • Brad Setser

    (Council on Foreign Relations)

Abstract

High oil prices are again transforming oil-exporting countries. With oil trading at $90 a barrel, government coffers in these countries are overflowing with the oil windfall, and stock markets there are booming. However, one feature of these oil exporters has not changed: their propensity to peg to the dollar. Large oil-exporting economies that border the Persian Gulf peg to the dollar even more tightly than China does while some others peg to a basket of currencies of oil-importing countries--mainly the dollar and the euro. These economies are making a policy mistake. They would be better served by a currency regime that assures their currencies depreciate when the price of oil falls and appreciate when the price of oil rises. Those that lack the institutions to conduct an autonomous monetary policy should peg to a basket that includes the price of oil. Exchange rate flexibility would reduce the need for domestic prices in the oil-exporting economies to rise and fall along with the price of oil, create additional room for monetary policy to reflect domestic conditions, and help oil-exporting economies manage the large swings in government revenue that accompany large swings in the oil price. The time has come to decouple the currencies of large oil-exporting economies from the dollar.

Suggested Citation

  • Brad Setser, 2007. "The Case for Exchange Rate Flexibility in Oil-Exporting Economies," Policy Briefs PB07-8, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb07-8
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    File URL: https://piie.com/publications/policy-briefs/case-exchange-rate-flexibility-oil-exporting-economies
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    Cited by:

    1. Faudot, Adrien, 2014. "Le régime rentier d’accumulation en Arabie saoudite et son mode de régulation," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 16.
    2. Khalid Rashid, Alkhater & Syed Abul, Basher, 2015. "The oil cycle, the Federal Reserve, and the monetary and exchange rate policies of Qatar," MPRA Paper 65900, University Library of Munich, Germany.
    3. 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.
    4. Aaditya Mattoo & Arvind Subramanian, 2009. "Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization," The World Economy, Wiley Blackwell, vol. 32(8), pages 1135-1164, August.
    5. Bedri Kamil Onur Tas & Selahattin Togay, 2008. "Optimal Monetary Policy for Postwar Iraq," Working Papers 0813, TOBB University of Economics and Technology, Department of Economics.
    6. Mohsin S. Khan, 2010. "The GCC Monetary Union: Choice of Exchange Rate Regime," Chapters,in: Currency Union and Exchange Rate Issues, chapter 5 Edward Elgar Publishing.
    7. 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.
    8. repec:eco:journ2:2017-03-01 is not listed on IDEAS
    9. Hermann Remsperger & Adalbert Winkler, 2009. "Welchen Einfluss hat der Wechselkurs auf die internationale Rolle von US-Dollar und Euro?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 10(1), pages 21-38, February.
    10. 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.

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