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

  • Chuku ChukuEmail author
Article
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Abstract

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).

Keywords

Windfall spending Monetary policy Dutch disease New Keynesian models 

JEL Classification

F41 E30 E58 E63 

Notes

Acknowledgements

I thank the anonymous reviewer for this journal for very helpful comments. I acknowledge with thanks, funding for this project provided by UNU-WIDER, with Grant ID 605UU–1548. I have benefited from review comments by Wisdom Akpalu, Paul Middleditch, and colleagues at the University of Manchester. Special thanks go to Edward Buffie, Andrew Berg, Luis-Felipe Zanna and Giovanni Melina at the IMF for technical support.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Macroeconomic Policy, Forecasting and Research DepartmentAfrican Development BankAbidjanCôte d’Ivoire
  2. 2.Department of EconomicsUniversity of UyoUyoNigeria

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