Monetary Regimes to Cope with Volatile Commodity Export Prices: Two Proposals

What monetary regime should commodity-exporting developing countries adopt? On the one hand, it is desirable to let the currency appreciate (depreciate) in response to positive (negative) terms of trade shocks. Such accommodation is precluded if the exchange rate is fixed or if the CPI is targeted literally. On the other hand, countries need some sort of nominal anchor. Monetary policy can be made automatically more counter-cyclical, judged by the criterion of currency appreciation in reaction to positive terms-of-trade shocks, under either of two regimes. Peggers can add the export commodity to a currency basket (CCB, for “Currency-plus-Commodity Basket”). Others can target Nominal Income instead of the CPI.