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Institutions and Macroeconomic Policies in Resource-Rich Arab Economies$
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Kamiar Mohaddes, Jeffrey B. Nugent, and Hoda Selim

Print publication date: 2019

Print ISBN-13: 9780198822226

Published to Oxford Scholarship Online: July 2019

DOI: 10.1093/oso/9780198822226.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 04 April 2020

The Currency-plus-Commodity Basket

The Currency-plus-Commodity Basket

A Proposal for Exchange Rates in Oil-Exporting Countries to Accommodate Trade Shocks Automatically

Chapter:
(p.149) 6 The Currency-plus-Commodity Basket
Source:
Institutions and Macroeconomic Policies in Resource-Rich Arab Economies
Author(s):

Jeffrey A. Frankel

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198822226.003.0006

This chapter proposes an exchange rate regime for oil-exporting countries, designed to deliver monetary policy that accommodates rather than exacerbates the effects of oil market swings, yet offers the transparency and predictability of a currency peg. The proposal is called currency-plus-commodity basket (CCB). The plan is to peg the national currency to a basket that includes not only the currencies of major trading partners but also the export commodity (oil). The chapter provides evidence from six Gulf Cooperation Council (GCC) countries that times when their currencies were “undervalued” relative to the CCB alternative were periods of overheating, as reflected in high inflation, and external imbalance, as reflected in high balance-of-payments surpluses. Conversely, periods when the currencies were “overvalued” featured unusually low inflation and low balance of payments. This suggests the economy would have been more stable under CCB. Finally, the chapter offers a practical blueprint for implementation of the proposal.

Keywords:   basket, currency, exchange rate, Gulf, oil, peg

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