Commodity Price Shocks and Imperfectly Credible Macroeconomic Policies in Commodity-Exporting Small Open Economies

 
Author/Editor: Juan Pablo Medina Guzman ; Claudio Soto
 
Publication Date: February 13, 2014
 
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Summary: In this paper, we analyze how lack of credibility and transparency of monetary and fiscal policies undermines the effectiveness of macroeconomic policies to isolate the economy from commodity price fluctuations. We develop a general equilibrium model for a commodity-exporting economy where macro policies are conducted through rules. We show that the responses of output, aggregate demand, and inflation to an increase in commodity price are magnified when these rules are imperfectly credible and lack transparency. If policies are imperfectly credible, then transparency helps private agents to learn the systematic behavior of the autorities, reducing the effects of commodity prices shocks. Coherent with the model, we show cross-country evidence that monetary policy transparency and fiscal credibility reduce the incidence of export price volatility on output volatility. Also, our results indicate that having an explicit fiscal rule and an inflation targeting regime contribute to isolate the economy from terms of trade fluctuations.
 
Series: Working Paper No. 14/33
Subject(s): Commodity prices | External shocks | Commodity price fluctuations | Monetary policy | Fiscal policy | Transparency | Economic models

 
English
Publication Date: February 13, 2014
ISBN/ISSN: 9781484306390/1018-5941 Format: Paper
Stock No: WPIEA2014033 Pages: 43
Price:
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