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Monetary policy rule, exchange rate regime, and fiscal policy cyclicality in a developing oil economy

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  • Algozhina, Aliya

Abstract

According to Frankel and Catao (2011), a commodity-exporting developing economy is advised to target the product price rather than consumer price, as the former monetary policy is automatically countercyclical against the volatile terms of trade shock. This paper constructs a dynamic stochastic general equilibrium model of joint monetary and fiscal policies for a developing oil economy, to find an appropriate monetary rule combined with a pro/counter/acyclical fiscal stance based on a loss measure. The foreign exchange interventions distinguish between a managed and flexible exchange rate regime, while fiscal policy cyclicality depends on the oil output response of public consumption and public investment. The study reveals that the best policy combination is a countercyclical fiscal stance and consumer price monetary targeting under a managed exchange rate regime to stabilize the domestic price inflation, aggregate output, and real exchange rate in a small open economy.

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  • Algozhina, Aliya, 2022. "Monetary policy rule, exchange rate regime, and fiscal policy cyclicality in a developing oil economy," Energy Economics, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:eneeco:v:112:y:2022:i:c:s0140988322002821
    DOI: 10.1016/j.eneco.2022.106126
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    Cited by:

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    2. Nurdaulet Abilov, 2020. "An Estimated Bayesian DSGE Model for Kazakhstan," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 8(1), pages 30-54, March.
    3. Tiwari, Aviral Kumar & Abakah, Emmanuel Joel Aikins & Abdullah, Mohammad & Adeabah, David & Sahay, Vinita S., 2024. "Time-varying relationship between international monetary policy and energy markets," Energy Economics, Elsevier, vol. 131(C).
    4. 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).
    5. Nikiforov Petro & Greshko Roman & Marych Maksym & Marusiak Nataliia & Kharabara Violetta & Gladchuk Olga, 2022. "Mutual Influence of Fiscal and Monetary Policy in the Context of Ensuring Macro-Financial Stability of the State," Management Theory and Studies for Rural Business and Infrastructure Development, Sciendo, vol. 44(4), pages 435-442, December.
    6. Shahzad, Umer & Orsi, Bianca & Sharma, Gagan Deep, 2024. "Managing inflation expectations and the efficiency of monetary policy responses to energy crises," Energy Economics, Elsevier, vol. 133(C).
    7. Oladunni, Sunday, 2020. "Oil Price Shocks and Macroeconomic Dynamics in an Oil-Exporting Emerging Economy: A New Keynesian DSGE Approach," MPRA Paper 104551, University Library of Munich, Germany, revised 12 Jun 2020.
    8. Hossein Tavakolian & Hamed Ghiaie, 2019. "Optimal Inflation Targeting in a Dual-Exchange Rate Oil Economy," THEMA Working Papers 2019-09, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    9. 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.
    10. Agboola, Emmanuel & Chowdhury, Rosen & Yang, Bo, 2024. "Oil price fluctuations and their impact on oil-exporting emerging economies," Economic Modelling, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    Monetary policy; Fiscal policy; Oil price; Managed exchange rate; CPI; PPT;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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