nep-cba New Economics Papers
on Central Banking
Issue of 2007‒06‒23
27 papers chosen by
Alexander Mihailov
University of Reading

  1. Is the Euro Sustainable? By Wickens, Michael R
  2. Liquidity Traps, Learning and Stagnation By Evans, G.W.; Guse, E.; Honkapohja, S
  3. Central banks, inflation targeting and employment creation By Gerald Epstein
  4. Monetary Policy with Uncertain Central Bank Preferences for Robustness. By Li Qin; Eleftherios Spyromitros; Moïse Sidiropoulos
  5. Oil Shocks and External Balances By Lutz Kilian; Alessandro Rebucci; Nikola Spatafora
  6. Optimal fiscal and monetary policy with costly wage bargaining By David M. Arseneau; Sanjay K. Chugh
  7. Disaggregate Productivity Comparisons: Sectoral Convergence in OECD Countries By Johannes Van Biesebroeck
  8. Understanding the puzzling effects of technology shocks By Pengfei Wang; Yi Wen
  9. The rise and fall of U.S. inflation persistence By Meredith Beechey; Par Osterholm
  10. Milton Friedman and U.S. monetary history: 1961-2006 By Edward Nelson
  11. Monetary policy and stock market booms and busts in the 20th century By Michael D. Bordo; Michael J. Dueker; David C. Wheelock
  12. The stability of large external imbalances: the role of returns differentials By Stephanie E. Curcuru; Tomas Dvorak; Francis E. Warnock
  13. Global Imbalances and Financial Stability By Miranda Xafa
  14. A two-pillar strategy to keep inflation expectations at bay: A basic theoretical framework. By Meixing DAI
  15. Monetary hyperinflations and money essentiality. By Alexandre Sokic
  16. Did the FED Inflate a Housing Price Bubble? A Cointegration Analysis between the 1980s and the 1990s By Clemente De Lucia
  17. Why has Swedish Inflation been Persistently Low? By Felix Hüfner
  18. Optimal exchange rate policy in a low interest rate environment By Pavasuthipaisit, Robert
  19. The daily and policy-relevant liquidity effects By Daniel L. Thornton
  20. Small price change response to a large devaluation in a menu cost model By Bruchez, Pierre-Alain
  21. Multivariate contemporaneous threshold autoregressive models By Michael J. Dueker; Zacharias Psaradakis; Martin Sola; Fabio Spagnolo
  22. Assessing French Inflation Persistence with Impulse Saturation Break Tests and Automatic General-to-Specific Modelling By Carlos Santos; Maria Alberta Oliveira
  23. Monetary Policy Transparency and Financial Market Forecasts in South Africa By Vivek B. Arora
  24. Modalities of Moving to Inflation Targeting in Armenia and Georgia By Andreas Billmeier; Daehaeng Kim; Era Dabla-Norris; V. Kramarenko; Mayra Rebecca Zermeno Livas
  25. Oil Price Shocks, Monetary Policy and Aggregate Demand in Ghana By Jumah, Adusei; Pastuszyn, Georg
  26. Money and Inflation in the Islamic Republic of Iran By Leo Bonato
  27. Exchange Rate Fluctuations and Output in Oil-Producing Countries: The Case of Iran By Mohsen Bahmani-Oskooee; Magda E. Kandil

  1. By: Wickens, Michael R
    Abstract: It is widely recognised that the "one-size-fits-all" monetary policy of the euro-zone is a potential problem. How much of a problem has not been much investigated. It is argued in this paper that it may result in the euro not being sustainable in the longer term without drastic changes to other aspects of the EU and, in particular, to fiscal policy. The problem is not the fault of the ECB, but is due to having a single nominal interest rate. As a result, the evidence reveals that national price levels are diverging over time which is leading to a permanent and unsustainable loss of competitiveness. A formal theory of inflation in the euro-zone based on an open-economy version of the New Keynesian model is used to analyse the problem. Although the euro system has automatic stabilising mechanisms arising from the changes in competitiveness and from absorbtion effects, these are shown to be not strong enough. The model is then modified to allow for fiscal transfers between countries and the size of the transfers required to produce a euro that may be sustainable are derived. It is shown that, in effect, this is an inflation tax, requiring high inflation countries to make transfers to low inflation countries as often happens within a single country in the form of unemployed benefits to low activity regions. Ultimately, the choice may lie between closer political union and a break-up of the euro-zone.
    Keywords: ECB; euro; inflation; monetary policy
    JEL: E5 E6
    Date: 2007–06
  2. By: Evans, G.W.; Guse, E.; Honkapohja, S
    Abstract: We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation. In contrast, policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals.
    Keywords: Adaptive Learning, Monetary Policy, Fiscal Policy, Zero Interest Rate Lower Bound, Indeterminacy
    JEL: E63 E52 E58
    Date: 2007–06
  3. By: Gerald Epstein (Political Economy Research Institute, University of Massachusetts)
  4. By: Li Qin; Eleftherios Spyromitros; Moïse Sidiropoulos
    Abstract: In this paper,we consider the transparency of monetary policy in a New Keynesian model with misspecification doubts. Model uncertainty allows us to identify a new source of central bank opacity, which refers to a lack of information about central bank’s preference for model robustness. Thus, taking into account this lack of transparency, we study its impacts on macroeconomic variables. We show that greater transparency can reduce the variability of output gap, inflation as well as that of their expected values.
    Date: 2007
  5. By: Lutz Kilian; Alessandro Rebucci; Nikola Spatafora
    Abstract: This paper studies the effects of demand and supply shocks in the global crude oil market on several measures of countries' external balance, including the oil and non-oil trade balances, the current account, and changes in net foreign assets (NFA) during 1975-2004. We explicitly take a global perspective. In addition to the U.S., the Euro area and Japan, we consider a number of country groups including oil exporters and middle-income oil-importing economies. We find that the effect of oil shocks on the merchandise trade balance and the current account, which depending on the source of the shock can be large, depends critically on the response of the nonoil trade balance, and differs systematically between the U.S. and other oil importing countries. Using the Lane-Milesi-Ferretti NFA data set, we document the presence of large and systematic (if not always statistically significant) valuation effects in response to oil shocks, not only for the U.S., but also for other oil-importing economies and for oil exporters. Our estimates suggest that increased international financial integration will tend to cushion the effect of oil shocks on NFA positions for major oil exporters and the U.S., but may amplify it for other oil importers.
    Date: 2007–05–07
  6. By: David M. Arseneau; Sanjay K. Chugh
    Abstract: Costly nominal wage adjustment has received renewed attention in the design of optimal policy. In this paper, we embed costly nominal wage adjustment into the modern theory of frictional labor markets to study optimal fiscal and monetary policy. Our main result is that the optimal rate of price inflation is highly volatile over time despite the presence of sticky nominal wages. This finding contrasts with results obtained using standard sticky-wage models, which employ Walrasian labor markets at their core. The presence of shared rents associated with the formation of long-term employment relationships sets our model apart from previous work on this topic. The existence of rents implies that the optimal policy is willing to tolerate large fluctuations in real wages that would otherwise not be tolerated in a standard model with Walrasian labor markets; as a result, any concern for stabilizing nominal wages does not translate into a concern for stabilizing nominal prices. Our model also predicts that smoothing of labor tax rates over time is a much less quantitatively-important goal of policy than standard models predict. Our results demonstrate that the level at which nominal wage rigidity is modeled -- whether simply lain on top of a Walrasian market or articulated in the context of an explicit relationship between workers and firms -- can matter a great deal for policy recommendations.
    Date: 2007
  7. By: Johannes Van Biesebroeck
    Abstract: International comparisons of productivity have used exchange rates or purchasing power parity (PPP) to make output comparable across countries. While aggregate PPP holds well in the long run, sectoral deviations are very persistent. It raises the need for a currency conversion factor at the same level of aggregation as the output that is compared. Mapping prices from household expenditure surveys into the industrial classification of sectors and adjusting for taxes and international trade, I obtain an expenditure-based sector-specific PPP. Using detailed price data for 1985, 1990, 1993, and 1996, I test whether the sectoral PPPs adequately capture differential changes in relative prices between countries. For agriculture and the majority of industrial sectors, but not for most service sectors, sectoral PPP is preferred over aggregate PPP. Using the most appropriate conversion factor for each industry, productivity convergence is found to be taking place in all but a few industries for a group of 14 OECD countries. The results are robust to the base year used for the currency conversion.
    Keywords: PPP; sectoral comparison; base year
    JEL: D24 F14 F31 O47
    Date: 2007–06–18
  8. By: Pengfei Wang; Yi Wen
    Abstract: Under aggregate technology shocks, both aggregate inputs and sectorial inputs decline initially and then rise permanently. However, under sector-specific technology shocks, sectorial inputs decline permanently. In addition, sectorial output is very responsive to aggregate technology shocks but not so to sector-specific technology shocks. We show that a flexible-price RBC model with firm entry and exit is consistent with these stylized facts.
    Keywords: Business cycles ; Equilibriuim (Economics)
    Date: 2007
  9. By: Meredith Beechey; Par Osterholm
    Abstract: This paper estimates the path of inflation persistence in the United States over the last 50 years and draws implications about the evolution of the Federal Reserve's monetary-policy preferences. Standard models of central-bank optimization predict persistent inflation outcomes. Time variation of the central bank's preference for output stability should be reflected in changes in inflation persistence. We estimate an ARMA(1,q) model with a time-varying autoregressive parameter for monthly U.S. inflation data from 1955 to 2006. The coefficients provide an estimate of the inflation target and the path of inflation persistence. The estimated inflation target over the sample is approximately 2.8 percent and we find that inflation persistence declined substantially during Volcker and Greenspan's tenures to a level significantly less than one and significantly below that of the 1970s and early 1980s.
    Date: 2007
  10. By: Edward Nelson
    Abstract: This paper brings together, using extensive archival material from several countries, scattered information about Milton Friedman's views and predictions regarding U.S. monetary policy developments after 1960 (i.e., the period beyond that covered by his and Anna Schwartz's Monetary History of the United States). I evaluate these interpretations and predictions in light of subsequent events.
    Keywords: Federal Reserve System - History ; Friedman, Milton ; Economic history
    Date: 2007
  11. By: Michael D. Bordo; Michael J. Dueker; David C. Wheelock
    Abstract: This paper examines the association between monetary policy and stock market booms and busts in the United States, United Kingdom, and Germany during the 20th century. Booms tended to arise when output growth was rapid and inflation was low, and end within a few months of an increase in inflation and monetary policy tightening. Latent variable VAR analysis of post-war data finds that inflation has had a particularly strong impact on market conditions, with disinflation shocks moving the market toward a boom and positive inflation shocks moving the market toward a bust. We conclude that central banks can contribute to financial market stability by minimizing unanticipated changes in inflation.
    Keywords: Monetary policy ; Stock exchanges
    Date: 2007
  12. By: Stephanie E. Curcuru; Tomas Dvorak; Francis E. Warnock
    Abstract: Were the U.S. to persistently earn substantially more on its foreign investments (“U.S. claims”) than foreigners earn on their U.S. investments (“U.S. liabilities”), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, utilizing data on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors, we find that the returns differential of U.S. claims over U.S. liabilities is essentially zero. Ending our sample in 2005, the differential is positive, whereas through 2004 it is negative; in both cases the differential is statistically indecipherable from zero. Moreover, were it not for the poor timing of investors from developed countries, who tend to shift their U.S. portfolios toward (or away from) equities prior to the subsequent underperformance (or strong performance) of equities, the returns differential would be even lower. Thus, in the context of equity and bond portfolios we find no evidence that the U.S. can count on earning more on its claims than it pays on its liabilities.
    Date: 2007
  13. By: Miranda Xafa
    Abstract: This paper discusses two opposing views on global imbalances: The "traditional view", which regards the imbalances as a threat to global economic and financial stability, and the "new paradigm" view, which considers that they are the natural consequence of economic and financial globalization. In terms of their policy implications, the traditional view focuses on monetary and fiscal policy decisions in the United States that need to be urgently reversed to avoid an abrupt unwinding of the imbalances involving a sell-off of dollar assets, a sharp increase in U.S. interest rates, and a hard landing for the global economy. By contrast, the new paradigm view considers that the imbalances will be resolved smoothly through the normal functioning of markets. The paper argues that an abrupt unwinding of imbalances is highly unlikely and advances a number of arguments in support of the new paradigm view.
    Date: 2007–05–09
  14. By: Meixing DAI
    Abstract: Using a simple macro-economic model, this study shows how a two-pillar monetary strategy as practiced by the European central bank (ECB) can be conceived to guarantee dynamic macro-economic stability and the credibility of monetary policy. This strategy can be interpreted as a combination of inflation targeting and monetary base targeting. A commitment to a long-run monetary base growth rate (monetary targeting) corresponding to inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. However, achieving price stability under inflationtargeting regime associated with Friedman’s money supply rule can generate dynamic instability in output, inflation and money demand. Alternative stabilizing monetary targeting rules, of which the design depends on economic structure and central bank preferences, are discussed relative to their capability to warrant dynamic macroeconomic stability.
    Keywords: two-pillar monetary strategy, inflation targeting, monetary targeting, macroeconomic stability.
    JEL: E44 E52 E58
    Date: 2007
  15. By: Alexandre Sokic
    Abstract: This paper aims at drawing new guidelines for investigation of monetary hyperinflation analysis. We propose a MIUF optimizing model and show that monetary hyperinflation can occur as a perfect foresight competitive equilibrium path only when money is essential in the sense of Scheinkman (1980). This result emerges without any ad-hoc assumption implying the inclusion of friction in the adjustment of some nominal variable. It suggests that monetary hyperinflation analysis under perfect foresight requires abandoning the Cagan money demand and adopting a demand for money respecting money essentiality.
    Keywords: monetary hyperinflation, seigniorage, inflation tax, money essentiality.
    JEL: E31 E41
    Date: 2007
  16. By: Clemente De Lucia (BNP Paribas, Paris, France)
    Abstract: The aim of this work is to verify if the recent episodes of expansionary policies followed by the FED contributed to the creation a housing price bubble. This study compares two different samples, both including periods of recession followed by accommodating monetary policies. The paper showed that even though the long-run relationship between inflation and the interest rate did not change along the whole sample, suggesting an unaltered behavior of the central bank with respect to changes in inflation, the reactivity of housing prices to monetary policy has considerably augmented during the 1990s compared to the 1980s. This is interpreted as evidence that prolonged accommodating monetary policies affected the US real estate market.
    Keywords: Housing Price Bubble, Monetary Policy, Cointegration
    JEL: E31 E41 E52
    Date: 2007–05
  17. By: Felix Hüfner
    Abstract: Average inflation in Sweden has been one of the lowest among European countries since the mid- 1990s. Three supply-side factors help to explain this phenomenon, all related in some sense to increased global integration. First, a shift towards imports from low-cost producing countries has resulted in falling import prices. Second, deregulation and increased product market competition with foreign companies entering the market has led to price falls in some sectors, notably in retailing. Third, wage growth has lagged productivity and kept unit labour costs down. This paper reviews these factors and analyzes the policy options for the central bank. This paper relates to the OECD Economic Survey of Sweden 2007 ( <P>Pourquoi l'inflation suédoise est-elle restée obstinément faible ? <BR>Depuis le milieu des années 90, la Suède affiche un des taux moyens d'inflation les plus faibles d'Europe. Ce phénomène s'explique en partie par trois facteurs relevant de l'offre, tous liés d'une certaine manière à l'intégration croissante de l'économie mondiale. Premièrement, un glissement vers les importations des pays à bas coûts de production s'est traduit par une baisse des prix des importations. Deuxièmement, la déréglementation et le renforcement de la concurrence avec les entreprises étrangères sur les marchés de produits ont entraîné une diminution des prix dans certains secteurs, notamment dans le commerce de détail. Troisièmement, la croissance des salaires a été plus lente que celle de la productivité, ce qui a maintenu les coûts unitaires de main d'oeuvre à un bas niveau. Ce document passe en revue ces facteurs et analyse les options politiques pour la banque centrale. Ce document de travail se rapporte à l’Étude économique de l’OCDE de la Suède 2007 (
    Keywords: Sweden, Suède, monetary policy, politique monétaire, inflation target, cible d'inflation, inflation, inflation, core inflation, Riksbank, Riksbank, socle d'inflation
    Date: 2007–06–11
  18. By: Pavasuthipaisit, Robert
    Abstract: This paper examines optimal exchange policy when nominal interest rates are unusually low, as experienced by several Asian economies and Japan since July 2006. The paper finds that in such environments, it is optimal to create a nominal depreciation to offset contractionary disturbances. However, the limited scope of monetary policy easing may compromise the ability of the central bank to create a nominal depreciation especially if the central bank makes decisions on monetary policy making on a discretionary basis. In order to successfully create a nominal depreciation, the central bank needs to rely on the expectations channel, by making a credible promise to keep its currency weak going forward. Finally, trade liberalization, by enhancing the role of the exchange rate channel on the transmission mechanism, may allow the central bank to achieve lower average inflation.
    Keywords: Zero lower bound; liquidity trap; exchange rate policy; open-economy macroeconomics.
    JEL: E58 E52 F41
    Date: 2007–05
  19. By: Daniel L. Thornton
    Abstract: In an environment of low inflation, the Federal Reserve faces the risk that it has not provided enough monetary stimulus even when it has pushed the short-term nominal interest rate to its lower bound of zero. Assuming the nominal Treasury-bill rate has been lowered to zero, this paper considers whether further open market purchases of Treasury bills could spur aggregate demand through increases in the monetary base that may stimulate aggregate demand by increasing liquidity for financial intermediaries and households; by affecting expectations of the future paths of short-term interest rates, inflation, and asset prices; or by stimulating bank lending through the credit channel. This paper also examines the alternative policy tools that are available to the Federal Reserve in theory, and notes the practical limitations imposed by the Federal Reserve Act, The tools the Federal Reserve has at its disposal include open market purchases of Treasury bonds and private-sector credit instruments (at least those that may be purchased by the Federal Reserve); unsterilized and sterilized intervention in foreign exchange; lending through the discount window; and, perhaps in some circumstances, the use of options.
    Keywords: Liquidity (Economics) ; Monetary policy
    Date: 2007
  20. By: Bruchez, Pierre-Alain
    Abstract: In an empirical paper based on five large devaluation episodes in Argentina, Brazil, Korea, Mexico and Thailand, Burstein and al. (2005a) find a very slow adjustment in the prices of non-tradable goods and services after large devaluations. Burnstein and al. (2005b) develop a quantitative general-equilibrium model that can account for this phenomenon. I consider an alternative, simpler model and explore under which conditions moderate menu costs can explain the muted response of the prices of non-tradables. The key new element in this alternative model is a nominal friction in wage-setting (generated by menu costs for changing wages). I find, for example, that although my model is based on menu costs, it is able to deliver not only constant prices of non-tradables, but also small price changes (in reality these prices do change, albeit by far less than the exchange rate). I also discuss the existence of multiple equilibria and the role of central-bank credibility.
    Keywords: large devaluation; exchange rate; pass-through; sticky prices; sticky wages
    JEL: F31
    Date: 2007–04–03
  21. By: Michael J. Dueker; Zacharias Psaradakis; Martin Sola; Fabio Spagnolo
    Abstract: In this paper we propose a contemporaneous threshold multivariate smooth transition autoregressive (C-MSTAR) model in which the regime weights depend on the ex ante probabilities that latent regime-specific variables exceed certain threshold values. The model is a multivariate generalization of the contemporaneous threshold autoregressive model introduced by Dueker et al. (2007). A key feature of the model is that the transition function depends on all the parameters of the model as well as on the data. The stability and distributional properties of the proposed model are investigated. The C-MSTAR model is also used to examine the relationship between US stock prices and interest rates.
    Keywords: Time-series analysis ; Capital assets pricing model
    Date: 2007
  22. By: Carlos Santos (Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto)); Maria Alberta Oliveira (ISMAI)
    Abstract: This paper has three different motivations. Firstly, we wish to contribute to the debate on whether French inflation has been persistent since the mid-eighties. Empirical evidence in this domain has been mixed. We use the standard method of testing for breaks in the mean of the inflation series to conclude whether possible unit root findings are the result of neglected breaks. Then, we build standard autoregressive representations of inflation, using an automatic general-to-specific approach. We conclude against inflation persistence in the sample period, and the point estimates of persistence we obtain are several percentage points below those achieved with other break tests and model selection methods. Moreover, our final model is congruent. Secondly, we provide the first empirical application of the new impulse saturation break test. The resulting estimates of the break dates are in line with other literature findings and have a sound economic meaning, confirming the good performance the test had revealed in theoretical and simulation studies. Finally, we also illustrate the shortcomings of the Bai-Perron test when applied to a small sample with high serial correlation. Indeed, we show the Bai- Perron break dates’ estimates would not allow us to build a congruent autoregressive representation of inflation.
    Keywords: Inflation Persistence, Break Tests, Model Selection, General-to-Specific
    JEL: E31 E65 C12 C22 C51
    Date: 2007–06
  23. By: Vivek B. Arora
    Abstract: The transparency of monetary policy in South Africa has increased substantially since the end of the 1990s; but little empirical work has been done to examine the economic benefits of the increased transparency. This paper shows that, in recent years, South African private sector forecasters have become better able to forecast interest rates, are less surprised by reserve bank policy announcements, and are less diverse in the cross-sectional variety of their interest rate forecasts. In addition, there is some evidence that the accuracy of inflation forecasts has increased. The improvements in interest rate and inflation forecasts have exceeded those in real output forecasts, suggesting that increases in reserve bank transparency are likely to have played a role.
    Date: 2007–05–29
  24. By: Andreas Billmeier; Daehaeng Kim; Era Dabla-Norris; V. Kramarenko; Mayra Rebecca Zermeno Livas
    Abstract: This paper reviews the current monetary and exchange rate policy frameworks in Armenia and Georgia, and the challenges associated with the choice of a credible nominal anchor in the context of large nominal and real shocks. The paper makes a case for a gradual transition to full-fledged inflation targeting (FFIT) in both countries in the medium term. The implications of this option are examined from various angles. In particular, the monetary transmission mechanisms and compliance with major institutional prerequisites for successful FFIT adoption are analyzed. Based on this analysis, the paper identifies a series of short- and medium-term recommendations, drawing on the experience of emerging market countries that successfully moved to FFIT.
    Date: 2007–06–12
  25. By: Jumah, Adusei (Department of Economics, University of Vienna, BWZ, Vienna, Austria); Pastuszyn, Georg (Department of Economics, University of Vienna, BWZ, Vienna, Austria)
    Abstract: The current study examines the relationship between the world oil price and aggregate demand in a developing country, Ghana, via the interest rate channel by means of cointegration analysis. Results of the study indicate that oil price—by impacting the price level positively—negatively impacts real output. The results also indicate that monetary policy is initially eased in response to a surge in the price of oil in order to lessen any growth consequences, but at the cost of higher inflation. The ensuing higher inflation, however, prompts a subsequent tightening of monetary policy leading to a further decline in output. In addition, output does not revert quickly to its initial level after an oil price shock, but declines over an extended period.
    Keywords: Aggregate demand, inflation, monetary policy, oil
    JEL: C32 E50 O13
    Date: 2007–06
  26. By: Leo Bonato
    Abstract: This paper looks at the determinants of inflation in Iran. Unlike the traditional estimates of the demand function for real money balances, the approach followed here focuses on the relationship between nominal variables and inflation. The model estimates are used to address the questions raised by the decline in inflation that occurred up to the first half of 2006, looking at the structural stability of the estimated relationships and the ability of the model to predict inflation at the end of the sample. The estimates confirm the strong relationship between money and inflation when M1 is used, with no evidence of a structural change.
    Date: 2007–05–15
  27. By: Mohsen Bahmani-Oskooee; Magda E. Kandil
    Abstract: Conventional wisdom states that currency depreciation in oil-producing countries are contractionary because demand effects, limited by the prevalence of oil exports priced in dollars, are more than offset by adverse supply effects. Iran, however, has experienced a rapid increase in non-oil exports in the last decade. Against this background, the paper tests whether the conventional wisdom still applies to Iran and concludes that the emergence of the non-oil export sector has made currency depreciation expansionary. The expansionary effect is particularly evident with respect to anticipated persistent depreciation in the long-run. Notwithstanding the varying effects of exchange rate fluctuations on the demand and supply sides of the economy, managing a flexible exchange rate gradually over time towards achieving stability in the real effective exchange rate may strike the necessary balance.
    Date: 2007–05–09

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