le, Vo Phuong Mai  ORCID: https://orcid.org/0000-0003-3374-9694 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| Status: | Unpublished |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: | 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: | 09 Nov 2022 10:53 |
| URI: | https://orca.cardiff.ac.uk/id/eprint/141004 |
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