Three Essays on Monetary Policy in Resource Dependent Economies

Abstract

This dissertation presents a comprehensive examination of the management of commodity price shocks in resource-rich developing economies across three interconnected chapters. In the first chapter, I provide empirical evidence on the relationship between real exchange rates and commodity prices among 28 commodity exporters from 1998 to 2018. I illustrate that active reserve management and stable exchange-rate regimes are key factors that can dampen the long-run impact of commodity price shocks and reduce real exchange-rate volatility. The second chapter employs a DSGE model to investigate the role of monetary policy under the presence of commodity price shocks. I find that a flexible exchange rate regime under the optimal rule is preferred to an exchange rate peg. However, monetary policy provides limited stabilization effects in an economy with a low degree of export diversification. Finally, in the third chapter, I incorporate foreign exchange reserves management into the DSGE model as monetary policy tools. I show that the combined implementation of optimal monetary and foreign exchange intervention rules can significantly reduce the macroeconomic volatility associated with commodity price shocks and result in the lowest welfare costs, particularly when integrated with flexible exchange rates and consumer price index targeting. Under a pegged exchange rate system with foreign exchange intervention, the accumulation of foreign assets can counteract commodity price windfalls, mitigating real exchange rate appreciation and enhancing trade balance.