Monetary rules for commodity traders

Luis Catão, Roberto Chang

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

The paper develops a model of a small economy that trades commodities whose world prices fluctuate exogenously, and studies its implications for monetary policy. It derives analytical characterizations of optimal Ramsey and flexible price allocations under both perfect risk sharing and financial autarky. This allows the paper to identify the crucial roles of production structure, price elasticities, and capital mobility in monetary policy evaluation. In a calibrated example, impulse-responses under PPI targeting track flexible price allocations closely, but can diverge greatly from Ramsey allocations when risk sharing is perfect and intratemporal elasticities are high. In those cases, policy rules that stabilize real exchange rates more than PPI targeting can deliver higher welfare. But PPI targeting is a clear winner under portfolio autarky.

Original languageEnglish (US)
Pages (from-to)52-91
Number of pages40
JournalIMF Economic Review
Volume61
Issue number1
DOIs
StatePublished - Apr 2013

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting(all)
  • Economics, Econometrics and Finance(all)

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