Oil Exporters: In Search of an External Anchor

43 Pages Posted: 20 Nov 2008

See all articles by Maurizio Michael Habib

Maurizio Michael Habib

European Central Bank (ECB)

Jan Strasky

European Central Bank (ECB)

Date Written: November 13, 2008

Abstract

This paper discusses the choice of an optimal external anchor for oil exporting economies, using optimum currency area criteria and simulations of a simple model of a small open economy pegging to a basket of two currencies. Oil exporting countries - in particular those of the Gulf Cooperation Council - satisfy a number of key optimum currency area criteria to adopt a peg. However, direction of trade and synchronisation of business cycle of oil exporters suggest that there is no single "ideal" external anchor among the major international currencies. Model simulations - parameterised for an oil exporting economy - indicate that a currency basket is generally preferable to a single currency peg, especially when some weight is placed by the policy maker on output stabilisation. Only when inflation becomes the only policy objective and external trade is mostly conducted in one currency that a peg to a single currency becomes optimal.

Keywords: oil exporting countries, exchange rate regimes, basket, model simulation

JEL Classification: F31, C30, C51, C61, O24

Suggested Citation

Habib, Maurizio Michael and Strasky, Jan, Oil Exporters: In Search of an External Anchor (November 13, 2008). ECB Working Paper No. 958, Available at SSRN: https://ssrn.com/abstract=1291166

Maurizio Michael Habib (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jan Strasky

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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