The macroeconomic effects of oil shocks under fixed and flexible ex change rates – a comparison

Abstract

THE RECENT experience of the United Kingdom, in which it was ultimately forced to leave the European Exchange Rate Mechanism (ERM), suggests that it may not be appropriate for an oil-producing and exporting economy to fix its nominal exchange rate against its major trading, and non-oil-producing, partners' currencies. This is likely to be the case for the UK, in particular, which is now experiencing declining oil production and a deterioration in its oil trade balance.In a recent paper in this journal, Harvie (1992a) suggested that, for this economy, a declining real exchange rate was necessary to improve the competitiveness of non-oil exports to offset the deteriorating oil trade balance. If the nominal exchange rate is fixed, vis-his its main trading partners' currencies, this implies that wages and prices would face the brunt of the adjustment, thereby requiring a more painful, and possibly more prolonged, adjustment of output and employment than would be the case with a flexible exchange rate.The objective of this paper is to explore further, from a primarily theoretical perspective, the macroeconomic implications arising for an oil-producing economy operating with either a fixed or flexible exchange rate system1to explore, in particular, which of these two extreme systems best offers insulatory properties, in the sense of reducing the volatility of adjustment of key macroeconomic variables arising primarily from oil-related shocks.The issue is explored by analyzing a theoretical framework, which emphasizes the long-run nature of the adjustment process. Such an emphasis is particularly pertinent in models which assume that economic agents possess rational expectations, where long-run equilibrium will have a major bearing upon the short-run adjustment process itself, However, due to the complexity of the model developed here, it is not possible to derive analytically unambiguous results, hence emphasis is placed upon deriving results through numerical simulation. The results derived The author is fram the

Oil Production Rehabilitation, Fiscal Policy and Economic Development in Libya: A Future View

“…The estimated parameters of Equation 21 are shown in 13 . Since a fixed exchange rate is assumed for the case of Libya, the money supply, and hence growth of it, is endogenously determined, and depends upon exogenously determined changes in domestic credit expansion ( dce ) and the accumulation of foreign exchange reserves through balance of payments surpluses/deficits ( fes ) (see (Harvie, 1993;Harvie and Thaha, 1994)) as shown in Equation 23* .…”

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“…It indicates the assumption of a fixed exchange rate combined with imperfect capital mobility 13 . Since a fixed exchange rate is assumed for the case of Libya, the money supply, and hence growth of it, is endogenously determined, and depends upon exogenously determined changes in domestic credit expansion ( dce ) and the accumulation of foreign exchange reserves through balance of payments surpluses/deficits ( fes ) (see (Harvie, 1993;Harvie and Thaha, 1994) …”

Resource price turbulence and macroeconomic adjustment for a resource exporter: A conceptual framework for policy analysis

“…1990s, endogenous capital stock accumulation was examined as an additional wealth effect, implications for adjustment arising from different exchange rate regimes (fixed or flexible) were considered, and optimal policy responses were identified in a dynamic context with the aim of minimising the adverse effects of a resource boom on the non resource sector (see Harvie, and Verrucci, 1991;Harvie, 1991;Harvie and Maleka, 1992;Harvie, 1992a;Harvie, 1992b;Harvie, 1992c;Harvie and Gower, 1993;Harvie, 1993;Harvie and Tran Van Hoa, 1994a;Harvie and Thaha, 1994). Given the recent turbulence in oil and resource prices it is opportune to revisit this issue.…”

“…The basic model is summarised in Table 1, which synthesises and extends the earlier contributions of Buiter and Purvis (1982), Harvie (1993) and Harvie and Thaha (1994), and contains a number of important underlying assumptions that are now briefly discussed.…”

“…The non-resource trade balance is given by Equation (11), and depends upon the real exchange rate, domestic real income and world real income. Equations (12) and (13) show the real and permanent income definitions used in the model, and first used by Buiter and Purvis (1982) (see also Harvie 1993.…”