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Monetary policy and commodity terms of trade shocks in emerging market economies

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  • Seedwell Hove
  • Albert Touna Mama
  • Fulbert Tchana Tchana

Abstract

Commodity terms of trade shocks have continued to drive macroeconomic ‡uctuations in most emerging market economies. The volatility and persistence of these shocks have posed great challenges for monetary policy. This study employs a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to evaluate the optimal monetary policy responses to commodity terms of trade shocks in commodity dependent emerging market economies. The model is calibrated to the South African economy. The study shows that CPI in‡ation targeting performs relatively better than exchange rate targeting and non-traded in‡ation targeting both in terms of reducing macroeconomic volatility and enhancing welfare. However, macroeconomic stabilisation comes at a cost of increased exchange rate volatility. The results suggest that the appropriate response to commodity induced exogeneous shocks is to target CPI inflation.

Suggested Citation

  • Seedwell Hove & Albert Touna Mama & Fulbert Tchana Tchana, 2012. "Monetary policy and commodity terms of trade shocks in emerging market economies," Working Papers 307, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:307
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    1. repec:kap:compec:v:51:y:2018:i:1:d:10.1007_s10614-016-9630-z is not listed on IDEAS
    2. Baaziz, Yosra & Labidi, Moez & Lahiani, Amine, 2013. "Does the South African Reserve Bank follow a nonlinear interest rate reaction function?," Economic Modelling, Elsevier, vol. 35(C), pages 272-282.
    3. Kablan, Sandrine & Ftiti, Zied & Guesmi, Khaled, 2017. "Commodity price cycles and financial pressures in African commodities exporters," Emerging Markets Review, Elsevier, vol. 30(C), pages 215-231.
    4. Chaudhuri, Sarbajit & Biswas, Anindya, 2016. "Endogenous labour market imperfection, foreign direct investment and external terms-of-trade shocks in a developing economy," Economic Modelling, Elsevier, vol. 59(C), pages 416-424.
    5. Dąbrowski, Marek A. & Wróblewska, Justyna, 2016. "Exchange rate as a shock absorber in Poland and Slovakia: Evidence from Bayesian SVAR models with common serial correlation," Economic Modelling, Elsevier, vol. 58(C), pages 249-262.
    6. Chetan Ghate & Sargam Gupta & Debdulal Mallick, 2018. "Terms of Trade Shocks and Monetary Policy in India," Computational Economics, Springer;Society for Computational Economics, vol. 51(1), pages 75-121, January.

    More about this item

    Keywords

    Commodity terms of trade; monetary policy; DSGE;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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