IDEAS home Printed from https://ideas.repec.org/p/inu/caeprp/2020006.html

Fiscal Stress and Monetary Policy Stance in Oil-Exporting Countries

Author

Listed:
  • Hao Jin

    (Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University)

  • Chen Xiong

    (Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University)

Abstract

We documented that for some oil-exporting countries, the correlation between exchange rates and oil prices is strongly negative during periods of significant oil price drop but is much weaker during other periods. To interpret this time-varying asymmetric correlation, we develop and estimate a Markov-switching small open economy New Keynesian model with oil income as a source of government revenue. In particular, we allow monetary and fiscal policy coefficients to switch across "active" and "passive" regimes. Using data on Russia, our result shows that the policy combinations fluctuate. We find that active monetary policy isolates the exchange rate from oil price variations but changes to passively tolerate depreciation and inflation to support government debt when oil price drops place fiscal policy in a state of stress. Counterfactual policy experiments suggest policy regime switching is crucial to account for the observed asymmetric impact of oil prices on the exchange rate and that the trans-mission channels of oil price shocks differ significantly across policy regimes.

Suggested Citation

  • Hao Jin & Chen Xiong, 2020. "Fiscal Stress and Monetary Policy Stance in Oil-Exporting Countries," CAEPR Working Papers 2020-006, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2020006
    as

    Download full text from publisher

    File URL: https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2020-006.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shan, Haiyan & Gu, Mengjie, 2024. "How does digital finance alleviate fiscal stress? Evidence from China," Economic Analysis and Policy, Elsevier, vol. 84(C), pages 1202-1221.
    2. Algozhina, Aliya, 2022. "Monetary policy rule, exchange rate regime, and fiscal policy cyclicality in a developing oil economy," Energy Economics, Elsevier, vol. 112(C).
    3. Xinping Zhang & Yimeng Zhang & Yunchan Zhu, 2021. "COVID-19 Pandemic, Sustainability of Macroeconomy, and Choice of Monetary Policy Targets: A NK-DSGE Analysis Based on China," Sustainability, MDPI, vol. 13(6), pages 1-20, March.
    4. Cao, Fangzhi & Su, Chi-Wei & Sun, Dian & Qin, Meng & Umar, Muhammad, 2024. "U.S. monetary policy: The pushing hands of crude oil price?," Energy Economics, Elsevier, vol. 134(C).
    5. Taufeeque Ahmad Siddiqui & Haseen Ahmed & Mohammad Naushad & Uzma Khan, 2023. "The Relationship between Oil Prices and Exchange Rate: A Systematic Literature Review," International Journal of Energy Economics and Policy, Econjournals, vol. 13(3), pages 566-578, May.
    6. Alstadheim, Ragna & Bjørnland, Hilde C. & Maih, Junior, 2021. "Do central banks respond to exchange rate movements? A Markov-switching structural investigation of commodity exporters and importers," Energy Economics, Elsevier, vol. 96(C).
    7. Omotosho, Babatunde S. & Yang, Bo, 2024. "Oil price shocks and macroeconomic dynamics in resource-rich emerging economies under regime shifts," Journal of International Money and Finance, Elsevier, vol. 144(C).
    8. Yildirim, Zekeriya & Guloglu, Hasan, 2024. "Macro-financial transmission of global oil shocks to BRIC countries — International financial (uncertainty) conditions matter," Energy, Elsevier, vol. 306(C).
    9. Zanxin Wang & Rui Wang & Yaqing Liu, 2024. "The macroeconomic effect of petroleum product price regulation in alleviating the crude oil price volatility," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-22, April.
    10. Guo, Junjie & Li, Youshu & Shao, Qinglong, 2022. "Cross-category spillover effects of economic policy uncertainty between China and the US: Time and frequency evidence," Journal of Asian Economics, Elsevier, vol. 80(C).
    11. Nenubari John Ikue & Lamin Mohammed Magaji & Samuel Zeb-Omoni & Mohammed, Aminu Usman & Joseph Osaro Denwi, 2021. "Trade Balance and Oil Shocks in African Oil Exporting Countries: A Panel Threshold Regression," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(4), pages 150-166, October.
    12. Sun, Xiaojin & Tsang, Kwok Ping, 2023. "Yield curve and the macroeconomy: Evidence from a DSGE model with housing," Journal of Macroeconomics, Elsevier, vol. 75(C).
    13. Zhang, Qi & Hu, Yi & Jiao, Jianbin & Wang, Shouyang, 2023. "Is refined oil price regulation a “shock absorber” for crude oil price shocks?," Energy Policy, Elsevier, vol. 173(C).
    14. Ghiaie, Hamed & Tabarraei, Hamid Reza & Tavakolian, Hossein, 2022. "Alternative monetary policy regimes in an oil-exporting economy," The Quarterly Review of Economics and Finance, Elsevier, vol. 83(C), pages 161-177.
    15. Donato Masciandaro & Davide Romelli & Stefano Ugolini, 2023. "Fiscal Dominance, Monetary Policy and Exchange Rates: Lessons from Early-Modern Venice," BAFFI CAREFIN Working Papers 23205, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inu:caeprp:2020006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Center for Applied Economics and Policy Research (email available below). General contact details of provider: https://edirc.repec.org/data/caeprus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.