How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?

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.

International nominal targeting: a proposal for policy coordination

Foreign exchange rates

The Effect of Monetary Policy on Real Commodity Prices

Commodity prices are back. This paper looks at connections between monetary policy, and agricultural and mineral commodities. We begin with the monetary influences on commodity prices, first for a large country such as the United States, then smaller countries. The claim is that low real interest rates lead to high real commodity prices. The theory is an analogy with Dornbusch overshooting. The relationship between real interest rates and real commodity prices is also supported empirically. One channel through which this effect is accomplished is a negative effect of interest rates on the desire to carry commodity inventories. The paper concludes with a consideration of implications for monetary policy.

The Internationalization of Equity Markets

This introduction to a forthcoming NBER volume on 'The Internationalization of Equity Markets' argues that the existing finance literature has in some respects not kept pace with world trends. Most empirical studies fail to take due account of the diversity of assets offered by countries around the world, the diversity of locales in which investors live, and the diversity of institutional peculiarities that characterize the markets in which assets and investors are brought together. Four of the papers in the volume are econometric studies of asset pricing and home-country bias in internationally integrated equity markets. The other four examine such issues as emerging markets, country funds, trading volume, location, taxes, controls, and other imperfections in international markets.