Thesis Abstract

Abstract
This research paper proposes a novel monetary regime tailored for small commodity-exporting countries, termed the "peg the export price" (PEP) regime. The PEP regime is designed to enhance economic stability and promote sustainable growth in these economies by pegging the domestic currency to the export price of the primary commodity. This approach aims to mitigate the adverse effects of commodity price volatility on these economies, which often face challenges such as Dutch disease, exchange rate fluctuations, and economic instability. The PEP regime operates by linking the domestic currency to the export price of the primary commodity through a transparent and rules-based mechanism. By pegging the currency to the export price, the PEP regime helps stabilize the terms of trade, reduce exchange rate volatility, and provide a reliable anchor for monetary policy. This can help small commodity-exporting countries maintain price stability, attract foreign investment, and foster economic diversification. Through a detailed analysis of the theoretical framework and empirical evidence, this paper demonstrates the potential benefits of the PEP regime for small commodity-exporting countries. By aligning the domestic currency with the export price, the PEP regime can help insulate these economies from external shocks and provide a more stable macroeconomic environment for growth and development. Additionally, the PEP regime can help reduce the vulnerability of these countries to commodity price fluctuations, allowing them to better manage their fiscal and monetary policies. The implementation of the PEP regime would require careful consideration of factors such as the choice of the primary commodity, the appropriate exchange rate mechanism, and the establishment of credible institutions to oversee the regime. Furthermore, coordination with other macroeconomic policies, such as fiscal policy and structural reforms, would be essential to ensure the effectiveness of the PEP regime in promoting long-term economic stability and growth. Overall, the PEP regime offers a promising alternative for small commodity-exporting countries to enhance economic resilience and foster sustainable development. By pegging the domestic currency to the export price, the PEP regime can help mitigate the challenges posed by commodity price volatility and contribute to a more stable and prosperous economic future for these countries.

Thesis Overview

The question of the optimal monetary regime for small open economies is still wide open. On the one hand, the big selling points of floating exchange rates – monetary independence and accommodation of terms of trade shocks – have not lived up to their promise. On the other hand, proposals for credible institutional monetary commitments to nominal anchors have each run aground on their own peculiar shoals. Rigid pegs to the dollar are dangerous when the dollar appreciates. Money targeting doesn’t work when there is a velocity shock. CPI targeting is not viable when there is a large import price shock. And the gold standard fails when there are large fluctuations in the world gold market. This paper advances a new proposal called PEP: Peg the Export Price.
Most applicable for countries that are specialized in the production of a particular mineral or agricultural product, the proposal calls on them to commit to fix the price of that commodity in terms of domestic currency. A series of simulations shows how such a proposal would have worked for oil producers over the period 1970-2000. The paths of real oil prices, exports, and debt are simulated under alternative regimes. An illustrative
finding is that countries that suffered a declining world market in oil or other export commodities in the late 1990s, would under the PEP proposal have automatically experienced a depreciation and a boost to exports when it was most needed. The argument for PEP is that it simultaneously delivers automatic accommodation to terms of trade shocks, as floating exchange rates are supposed to do, while retaining the credibility-enhancing advantages of a nominal anchor, as dollar pegs are supposed to do.