OIL PRICES, U.S. DOLLAR FLUCTUATIONS, AND MONETARY POLICY IN A SMALL OPEN OIL EXPORTING ECONOMY

Abstract

We develop a New­Keynesian model of a small­open oil­exporting economy to quantify the dynamic effects of oil price and U.S. dollar fluctuations. Two alternative monetary policies are considered: Taylortype and money supply rules. Oil, priced in the U.S. dollar, is the only commodity to export and the country borrows and mainly imports in
terms of the euro. The country is, therefore, facing two exchange rates : The euro/U.S. dollar and U.S. dollar/Algerian dinar. Simulation results suggest that depreciations of the U.S. dollar have implied large country's terms of trade and current account deteriorations, because of external debt valuation, interest payments, and import prices. However, parallel increases in oil prices have offset these negative effects and led to large improvement of the country's net debt position and current
account. Moreover, monetary authority may successfully manage the value of its currency and/or adjust the short­run nominal interest rate to isolate the Algerian economy from these external shocks.