Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective |
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Institution: | 1. Department of Finance, Ming Chuan University, Taipei City, Taiwan, ROC;2. Department of Money and Banking, National Kaohsiung First University of Science and Technology, Kaohsiung City, Taiwan, ROC;3. Bank of Kaohsiung, Kaohsiung City, Taiwan, ROC;1. IÉSEG School of Management (LEM-CNRS), Lille Catholic University, 3, rue de la Digue, 59000 Lille, France;2. Faculty of Business Administration, Lakehead University, 955 Oliver Road, Thunder Bay, Ontario P7B 5E1, Canada |
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Abstract: | This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare. |
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