Yemen: Exchange Rate Policy in the Face of Dwindling Oil Exports

By Todd Schneider, Nabil Ben Ltaifa, Faisal Ahmed, Saade Chami

January 1, 2007

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Todd Schneider, Nabil Ben Ltaifa, Faisal Ahmed, and Saade Chami. Yemen: Exchange Rate Policy in the Face of Dwindling Oil Exports, (USA: International Monetary Fund, 2007) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper investigates the likely implications of declining oil production on Yemen's equilibrium exchange rate, and discusses policy options to ensure a smooth transition to a nonoil economy. The empirical results suggest that, as oil production and foreign exchange earnings fall, the Yemeni rial will have to adjust downward in real effective terms to keep pace with the equilibrium exchange rate. In light of strong pass-through from exchange rate depreciation to domestic inflation, this could entail a substantial depreciation in nominal terms. Given the nature of the adjustment, a floating exchange rate regime appears to be the best option, if supported by appropriate macroeconomic policies. However, given public fixation on a exchange rate stability, a softly managed float would be a better option for Yemen whereby the central bank may have to lead the market toward the equilibrium exchange rate.

Subject: Exchange rate arrangements, Exchange rates, Foreign exchange, Oil production, Production, Real effective exchange rates, Real exchange rates

Keywords: Adjustment process, Africa, Band in an effort, Crawling peg, Crawling peg exchange regime, Crawling peg regime, Depreciation, Developments in Yemen, Equilibrium exchange rate, Exchange rate, Exchange rate arrangements, Exchange rate band, Exchange rate depreciation, Exchange rate development, Exchange rate pass-through effect, Exchange rates, Global, Nominal exchange rate, Oil, Oil production, Real effective exchange rate, Real effective exchange rates, Real exchange rates, Regime in the form, WP, Yemen

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/005
Stock No:

WPIEA2007005
ISBN:

9781451865691
ISSN:

1018-5941

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