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

  • Todd Schneider
  • Nabil Ben Ltaifa
  • Faisal Ahmed
  • Saade Chami
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    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.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/5.

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    Length: 22
    Date of creation: 01 Jan 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/5
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    7. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper: In Search of Commodity Currencies," IMF Working Papers 02/223, International Monetary Fund.
    8. Mohsin S. Khan & Jonathan David Ostry, 1991. "Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries," IMF Working Papers 91/3, International Monetary Fund.
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    11. Ronald Macdonald & Luca Antonio Ricci, 2004. "Estimation Of The Equilibrium Real Exchange Rate For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 282-304, 06.
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    13. Barry Eichengreen, 2000. "Solving the Currency Conundrum," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(3), pages 315-339, November.
    14. Serven, Luis & Solimano, Andres, 1992. "Private Investment and Macroeconomic Adjustment: A Survey," World Bank Research Observer, World Bank Group, vol. 7(1), pages 95-114, January.
    15. Taline Koranchelian, 2005. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country: Algeria’s Experience," IMF Working Papers 05/135, International Monetary Fund.
    16. Claudio Paiva, 2001. "Competitiveness and the Equilibrium Exchange Rate in Costa Rica," IMF Working Papers 01/23, International Monetary Fund.
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