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Journal of Economic Integration 2002 September;17(3) :417-448.
A Proposal to Anchor Monetary Policy by the Price of the Export Commodity

Jeffrey Frankel Ayako Saiki 

Harrard University
Brandeis University
Copyright ©2002 Journal of Economic Integration
The debate over monetary standards and exchange rate regimes for developing countries is as wide open as ever. 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, for example, are dangerous when the dollar appreciates relative to other export markets. This study explores a new proposal that countries specialized in the export of a particular commodity should peg their currency to that commodity. When the dollar price of the commodity on world markets falls, the dollar exchange rate of the local currency would fall in tandem. The country would reap the best of both worlds: the advantage of a nominal anchor for monetary policy, together with the automatic accommodation to terms of trade shocks that floating rates claim to deliver. We conduct a set of counter-factual experiments. For each of a list of countries specialized in particular mineral or agricultural commodities, what would have happened, over the last 30 years, if it had pegged its currency to that commodity, as compared to pegging to the dollar, yen, or mark, or as compared to whatever exchange rate policy it actually followed historically? We compute under these scenarios the price of the commodity in local terms, and we then simulate the implications for exports. Illustrative of the results is that some victims of financial difficulties in the late 1990s might have achieved a stimulus to exports precisely when it was most needed, without having to go through wrenching currency collapses, if they had been on regimes of pegging to their export commodity: South Africa to gold or platinum, Nigeria and Indonesia to oil, Chile to copper, Argentina to wheat, Colombia to coffee, and so on. JEL Classifications (E5, F4)
Keywords: Money | Nominal Anchor | Peg | Terms of Trade | Agricultural Commodities | Mineral Commodities | Gold
1. Aoki, Kosuke (2001), "Optimal Monetary Policy Responses to Relative Price Changes, Journal of Monetary Economics 48, 55-80.
2. Svensson, Lars (1995), "The Swedish Experience of an Inflation Target," in Inflation Targets, edited by Leo Leiderman and Lars Svensson (Centre for Economic Policy Research: London).
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Impact of South Africa's Monetary Policy on the LNS Economies  2010 June;25(2)
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