Template-type: ReDIF-Article 1.0
Author-Name: Valery Charnavoki
Author-Email: vcharnavoki@nes.ru
Author-Workplace-Name: New Economic School
Title: International Risk-Sharing and Optimal Monetary Policy in a Small Commodity-Exporting Economy
Abstract: This paper evaluates the welfare implications of alternative monetary policy regimes for a small commodity-exporting economy. In line with the existing literature, welfare analysis shows that a flexible exchange rate regime tends to outperform a fixed nominal exchange rate. However, this paper shows that the welfare costs of a nominal peg vary considerably with the extent of international risk-sharing. In a model with complete and frictionless asset markets, real exchange rate volatility is small, and welfare losses from the nominal peg are negligible. By contrast, under financial autarky, a fixed nominal exchange rate generates significant volatility in inflation and results in large welfare costs. I also consider the welfare properties of flexible regimes, showing that core consumer inflation targeting and non-commodity domestic inflation targeting are not generally optimal, although their welfare costs are small compared to those of a fixed regime. Furthermore, the welfare ranking of these two regimes might depend on the currency in which the tradable goods are priced (producer-currency pricing vs. local-currency pricing).
Classification-JEL: E52, F41, Q43
Keywords: commodity currency, international risksharing, optimal monetary policy, exchange rate regime
Journal: Russian Journal of Money and Finance
Pages: 3-27
Volume: 78
Issue: 2
Year: 2019
Month: June
DOI: 10.31477/rjmf.201902.03
File-URL: https://rjmf.econs.online/upload/iblock/6b9/MtF_78-02-EN_Charnavoki.pdf
Handle: RePEc:bkr:journl:v:78:y:2019:i:2:p:3-27