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Faculty Research Working Paper Series
Jeffrey A. Frankel
James W. Harpel Professor of Capital Formation and Growth
phone: (617)496-3834
fax: (617)496-5747
How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?
Frankel, Jeffrey A. "How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?" HKS Faculty Research Working Paper Series RWP11-015, February 2011.
Abstract
Fiscal and monetary policy each has a role to play in mitigating the volatility that stems from the large trade shocks hitting commodity-exporting countries. All too often macroeconomic policy is procyclical, that is, destabilizing, rather than countercyclical. This paper suggests two institutional innovations designed to achieve greater countercyclicality, one for fiscal policy and one for monetary policy. The proposal for fiscal policy is to emulate Chile’s structural budget rule, and particularly its avoidance of over-optimism in forecasting. The proposal for monetary policy is called Product Price Targeting (PPT), an alternative to CPI-targeting that is designed to be more robust with respect to terms of trade shocks.
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