Essays on monetary policy for commodity-exporting economies

The first chapter conducts an optimal monetary policy evaluation for a small open economy with a commodity-producing sector, under flexible prices but financial frictions. Commodity-producing firms face collateralized borrowing constraints for international loans. Confronted with correlated commodity prices and world activity shocks, the best monetary policy rule is a feedback rule that targets consumer price inflation under a standard ad hoc loss function. However, under a second ad hoc loss function that adds the nominal exchange rate volatility, the best monetary policy rule is given by a feedback nominal exchange rate targeting rule.

The second chapter characterizes the constrained efficient- and -time-invariant optimal monetary policy under full commitment for a small open economy with a commodity sector, financial frictions and sticky prices through a recursive Ramsey policy approach. In response to correlated commodity price and world activity shocks, the simple and implementable rule that comes closest to the constrained efficient optimum is a strict domestic inflation targeting rule. Despite borrowings being set in foreign currency, nominal exchange rate targeting rules (and exchange rate peg rules) are (highly) welfare detrimental. Under the optimal policy, greater price flexibility is associated with higher nominal exchange rate volatility and welfare losses.

The last chapter characterizes the optimal sustainable policy through its operational optimal quasi-sustainable policy for a small open- and -commodity-exporting economy with financial friction set as a foreign nominal borrowing limit. Contrasting the quasi-sustainable policy against predictions of the optimal commitment and the optimal discretionary policies in response to positive commodity price shocks, the optimal quasi-sustainable policy coincides with the optimal commitment policy. This implies that the reputation assumption under the first policy corresponds to the commitment assumption made under the second policy. Furthermore, the sustainable equilibrium under the first policy is consistent with the competitive equilibrium attained under the second policy.