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Monetary policy in a model with commodity and financial markets

le, Vo Phuong Mai and Naraidoo, Ruthira 2019. Monetary policy in a model with commodity and financial markets. [Working Paper]. Economic Research Southern Africa and Cardiff University.

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Abstract

This paper builds a small open economy model for a net commodity exporter to consider financial frictions and monetary policies in order to investigate the main determinants of business cycles. Since we make a distinction to the access of financial markets between the commodity and non-commodity sectors, we notice that as usual, a commodity price shock benefits the competitiveness of the economy and its borrowing terms. We outline a novel effect in this paper which we dub the 'financial market effect' following a positive commodity price shock that decreases the credit premium and hence exacerbate the commodity price boom. However the negative sectoral downturn affects entrepreneur credit together with disinflationary pressures of a real exchange rate appreciation. This opens the role for stabilization policies which we analyse comparing three types of monetary regimes. Estimating the model on South Africa, a major commodity exporting economy with inflation targeting regime, we find as conventional wisdom suggests that a hypothetical Taylor rule targeting the price-level allows for adjustment in inflation expectations that can dampen disinflationary pressures. Furthermore, due to smoother change in nominal rate of interest, there is lesser variability in financial markets.

Item Type: Monograph (Working Paper)
Status: Unpublished
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Economic Research Southern Africa and Cardiff University
Date of Acceptance: 30 March 2019
Last Modified: 10 May 2021 12:00
URI: http://orca.cardiff.ac.uk/id/eprint/141004

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