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Notes on the Underground: Monetary Policy in Resource-Rich Economies

Author

Listed:
  • Ferrero, Andrea
  • Seneca, Martin
Abstract
The central bank of a commodity-exporting small open economy faces the traditional stabilization tradeoff between domestic inflation and output gap. The commodity sector introduces a terms-of-trade inefficiency that gives rise to an endogenous cost-push shock, changes the target level for output, reduces the slope of the Phillips curve, and increases the importance of stabilizing the output gap. Optimal monetary policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price inflation needs to raise interest rates to limit the inflationary impact of an exchange rate depreciation.

Suggested Citation

  • Ferrero, Andrea & Seneca, Martin, 2018. "Notes on the Underground: Monetary Policy in Resource-Rich Economies," CEPR Discussion Papers 13108, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13108
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    Citations

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    Cited by:

    1. Algozhina, Aliya, 2022. "Monetary policy rule, exchange rate regime, and fiscal policy cyclicality in a developing oil economy," Energy Economics, Elsevier, vol. 112(C).
    2. van der Ploeg, Frederick, 2019. "Macro policy responses to natural resource windfalls and the crash in commodity prices," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 263-282.
    3. Melina, Giovanni & Yang, Shu-Chun S. & Zanna, Luis-Felipe, 2016. "Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model," Economic Modelling, Elsevier, vol. 52(PB), pages 630-649.
    4. Rick Van der Ploeg, 2016. "Macro Policy Responses To Natural Resource Windfalls," OxCarre Working Papers 178, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    5. Maryam Ahmadi & Matteo Manera, 2021. "Oil Price Shocks and Economic Growth in Oil-Exporting Countries," Working Papers 2021.13, Fondazione Eni Enrico Mattei.
    6. Bergholt, Drago & Larsen, Vegard H. & Seneca, Martin, 2019. "Business cycles in an oil economy," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 283-303.
    7. Bergholt, Drago & Røisland, Øistein & Sveen, Tommy & Torvik, Ragnar, 2023. "Monetary policy when export revenues drop," Journal of International Money and Finance, Elsevier, vol. 137(C).
    8. Omotosho, Babatunde S., 2020. "Oil price shocks, fuel subsidies and macroeconomic (in)stability in Nigeria," MPRA Paper 105464, University Library of Munich, Germany.
    9. Malova, Aleksandra & van der Ploeg, Frederick, 2017. "Consequences of lower oil prices and stranded assets for Russia's sustainable fiscal stance," Energy Policy, Elsevier, vol. 105(C), pages 27-40.
    10. Ohad Raveh, 2020. "Monetary Policy, Natural Resources, and Federal Redistribution," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(3), pages 585-613, March.
    11. Ortiz, Marco & Herrera, Gerardo & Perez, Fernando, 2022. "The shine beneath: foreign exchange intervention in resource-rich economies," MPRA Paper 116208, University Library of Munich, Germany.
    12. Omotosho, Babatunde Samson, 2022. "Oil price shocks and monetary policy in resource-rich economies: Does capital matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    13. William A. Barnett & Unal Eryilmaz, 2022. "Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202203, University of Kansas, Department of Economics.
    14. Stefano Gnocchi & Fanny McKellips & Rodrigo Sekkel & Laure Simon & Yinxi Xie & Yang Zhang, 2024. "The Output-Inflation Trade-off in Canada," Discussion Papers 2024-07, Bank of Canada.
    15. Chuku Chuku & Jacob Oduor & Anthony Simpasa & Peter Mwanakatwe, 2019. "Working Paper 318 - A DGE Model for Growth and Development Planning: Malawi," Working Paper Series 2444, African Development Bank.
    16. Faltermeier, Julia & Lama, Ruy & Medina, Juan Pablo, 2022. "Foreign exchange intervention for commodity booms and busts," European Economic Review, Elsevier, vol. 143(C).
    17. Tenreyro, Silvana & Drechsel, Thomas & McLeay, Michael, 2019. "Monetary policy for commodity booms and busts," CEPR Discussion Papers 14030, C.E.P.R. Discussion Papers.
    18. Omotosho, Babatunde S., 2019. "Business Cycle Fluctuations in Nigeria: Some Insights from an Estimated DSGE Model," MPRA Paper 98351, University Library of Munich, Germany.

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    2. Bergholt, Drago & Røisland, Øistein & Sveen, Tommy & Torvik, Ragnar, 2023. "Monetary policy when export revenues drop," Journal of International Money and Finance, Elsevier, vol. 137(C).
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    More about this item

    Keywords

    Small open economy; Oil export; Monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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