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Constraintson the Design and Implementation of Monetary Policy in Oil Economies: The Case of Venezuela

  • International Monetary Fund

By definition, fiscal dominance impedes the effective implementation of any monetary strategy aimed at controlling inflation. Economies that exhibit oil dominance-a situation in which oil exports largely affect the main macroeconomic indicators-may also exhibit fiscal dominance. However, in this case, the standard indicators used to gauge the presence of fiscal dominance may fail to give the appropriate signals. The main purpose of this paper is twofold: i) to present a simple framework to analyze fiscal dominance in oil exporting countries and ii) to test the hypothesis of the presence of oil dominance/fiscal dominance (OD/FD) in the case of Venezuela. Using VAR and VEC models it is possible to conclude that there is relevant evidence supporting the validity of the OD/FD hypothesis.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/142.

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Length: 47
Date of creation: 01 Jun 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/142
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  1. Pierre-Richard Agénor, 2002. "Monetary Policy under Flexible Exchange Rates: An Introduction to Inflation Targeting," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 3, pages 079-170 Central Bank of Chile.
  2. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
  3. Bennett T. McCallum & Edward Nelson, 2004. "Targeting vs. Instrument Rules for Monetary Policy," NBER Working Papers 10612, National Bureau of Economic Research, Inc.
  4. Steven Barnett & Rolando Ossowski, 2002. "Operational Aspects of Fiscal Policy in Oil-Producing Countries," IMF Working Papers 02/177, International Monetary Fund.
  5. Pierpaolo Benigno & Michael Woodford, 2004. "Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 271-364 National Bureau of Economic Research, Inc.
  6. Victor Olivo & Stephen M. Miller, 2000. "The Long-Run Relationship between Money, Nominal GDP, and the Price Level in Venezuela: 1950 to 1996," Working papers 2000-05, University of Connecticut, Department of Economics.
  7. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
  8. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  9. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  10. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
  11. International Monetary Fund, 2006. "The Net Worth Approach to Fiscal Analysis; Dynamics and Rules," IMF Working Papers 06/17, International Monetary Fund.
  12. Christopher P. Ball & Javier Reyes, 2004. "Inflation targeting or fear of floating in disguise: the case of Mexico," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 49-69.
  13. Jarkko Soikkeli, 2002. "The Inflation Targeting Framework in Norway," IMF Working Papers 02/184, International Monetary Fund.
  14. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  15. Marc Zelmer & Andrea Schaechter & Mark R. Stone & Alina Carare, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 02/102, International Monetary Fund.
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