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Yemen; Exchange Rate Policy in the Face of Dwindling Oil Exports

Author

Listed:
  • Todd Schneider
  • Nabil Ben Ltaifa
  • Faisal Ahmed
  • Saade Chami

Abstract

This paper investigates the likely implications of declining oil production on Yemen's equilibrium exchange rate, and discusses policy options to ensure a smooth transition to a nonoil economy. The empirical results suggest that, as oil production and foreign exchange earnings fall, the Yemeni rial will have to adjust downward in real effective terms to keep pace with the equilibrium exchange rate. In light of strong pass-through from exchange rate depreciation to domestic inflation, this could entail a substantial depreciation in nominal terms. Given the nature of the adjustment, a floating exchange rate regime appears to be the best option, if supported by appropriate macroeconomic policies. However, given public fixation on a exchange rate stability, a softly managed float would be a better option for Yemen whereby the central bank may have to lead the market toward the equilibrium exchange rate.

Suggested Citation

  • Todd Schneider & Nabil Ben Ltaifa & Faisal Ahmed & Saade Chami, 2007. "Yemen; Exchange Rate Policy in the Face of Dwindling Oil Exports," IMF Working Papers 07/5, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:07/5
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    References listed on IDEAS

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    3. Giavazzi, Francesco & Sheen, Jeff R & Wyplosz, Charles, 1988. "The Real Exchange Rate and the Fiscal Aspects of a Natural Resource Discovery," Oxford Economic Papers, Oxford University Press, vol. 40(3), pages 427-450, September.
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    Cited by:

    1. 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.
    2. Ansari, Dawud, 2016. "Resource curse contagion in the case of Yemen," Resources Policy, Elsevier, vol. 49(C), pages 444-454.

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