Fiscal Stress and Monetary Policy Stance in Oil-Exporting Countries

CAEPR WORKING PAPER SERIES 2020-006

41 Pages Posted: 5 Aug 2020

See all articles by Hao Jin

Hao Jin

Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University

Chen Xiong

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Date Written: July 1, 2020

Abstract

We documented that for some oil-exporting countries, the correlation between exchange rates and oil prices is strongly negative during periods of significant oil price drop but is much weaker during other periods. To interpret this time-varying asymmetric correlation, we develop and estimate a Markov-switching small open economy New Keynesian model with oil income as a source of government revenue. In particular, we allow monetary and fiscal policy coefficients to switch across "active" and "passive" regimes. Using data on Russia, our result shows that the policy combinations fluctuate. We find that active monetary policy isolates the exchange rate from oil price variations but changes to passively tolerate depreciation and inflation to support government debt when oil price drops place fiscal policy in a state of stress. Counterfactual policy experiments suggest policy regime switching is crucial to account for the observed asymmetric impact of oil prices on the exchange rate and that the transmission channels of oil price shocks differ significantly across policy regimes.

Keywords: Fiscal Policy; Monetary Policy; Exchange Rate; Oil Price

JEL Classification: E52, E63, F41, Q43

Suggested Citation

Jin, Hao and Xiong, Chen, Fiscal Stress and Monetary Policy Stance in Oil-Exporting Countries (July 1, 2020). CAEPR WORKING PAPER SERIES 2020-006, Available at SSRN: https://ssrn.com/abstract=3651014 or http://dx.doi.org/10.2139/ssrn.3651014

Hao Jin (Contact Author)

Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University ( email )

Economics Building D215
Xiamen University
Xiamen, Fujian 361005
China
86-592-2180353 (Phone)
86-592-2187708 (Fax)

HOME PAGE: http://haojin.weebly.com/

Chen Xiong

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

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