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

IMF Working Papers, February 13, 2014

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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.
Develop a general equilibrium model for a commodity-exporting economy where macro policies are conducted through rules.
Provide cross-country empirical evidence to test model implications.

The responses of output, aggregate demand, and inflation to an increase in commodity price are magnified when policy rules are imperfectly credible and lack transparency.
When policies are imperfectly credible, greater transparency helps private agents learn the systematic behavior of the authorities, thereby reducing the effects of commodity price shocks.
Having an explicit fiscal rule and an inflation targeting regime contributes to isolating the economy from terms of trade fluctuations.

Monetary policy transparency and fiscal credibility reduce the incidence of export price volatility on output volatility.
Evidence is presented as coherent with model predictions (no numerical magnitudes are specified in the summary text).

Enhance monetary policy transparency to improve private agents' learning of systematic policy behavior.
Strengthen fiscal credibility, including consideration of explicit fiscal rules, to reduce output sensitivity to export price volatility.
Adopt or maintain an inflation targeting regime to help insulate the economy from terms of trade fluctuations.

_wp1433: Appendix A — Simulation Under Imperfect Credibility
- _wp1433: Appendix A — Simulation Under Imperfect Credibility (Markdown version)
- _wp1433: Appendix A — Simulation Under Imperfect Credibility (PDF)