Monetary policy options for managing resource revenue shocks when fiscal policy is laissez-faire

This study examines the implications of alternative monetary policy regimes to deal with resource revenue shocks when fiscal policy is laissez-faire—that is, when the government spends all resource revenue windfalls contemporaneously. A three-sector dynamic stochastic general equilibrium model is used. The model features key structural characteristics of resource-rich developing economies, such as the Dutch disease, limited international capital mobility, credit constrained consumers, and limited labour mobility. The model is calibrated to match a typical resource-rich developing economy. Three alternative monetary policy regimes are considered: a flexible exchange rate, a crawling peg, and a money growth target. The policy evaluation exercise indicates that a flexible exchange rate with inflation targeting regime is the best among the policy options considered. Specifically, this option yields a meager 0.16 percent loss in welfare terms, compared with higher levels of welfare losses associated with a crawling peg with partial domestic absorption (0.17 percent), and a money growth target with full sterilization (0.26 percent).