monetary policy and commodity terms of trade shocks

The commodity terms of trade shocks are important to explain the macroeconomic fluctuations of oil-exporting countries. oil price shocks are the main source of terms of trade variability in oil-exporting countries. given the significant effects of terms of trade fluctuations on domestic macroeconomic variables, understanding the transmission and propagation of terms of trade fluctuations is crucial in the design and conduct of macroeconomic policies in oil-exporting countries. an appropriate monetary policy can help to stabilize these shocks. this study evaluates three alternative monetary policy regimes' responses to commodity terms of trade shock and export sector productivity shock using a new keynesian dynamic stochastic general equilibrium (dsge) model. the model is calibrated to the iran economy. this study aims at investigating the dynamic effects of commodity terms of trade shocks and evaluating the performance and the stabilization properties of various simple monetary policy rules for oil-dependent economies. three alternative monetary policy rules have been considered: cpi inflation targeting (cit) rule, non-traded inflation targeting (ntit) rule, and exchange rate targeting (et) rule. the comparison of responses under different monetary policy regimes shows that cpi inflation targeting is superior to the ntit and et targeting when commodity terms of trade shock happen. for export productivity shock, the performance of the cit rule is better than other examining monetary policy rules. also, the real exchange rate, which is defined as a function of commodity terms of trade and productivity differentials, makes it possible to examine the role of export productivity shock on macroeconomic variations and test the existence of balassa- samuelson effect. under the export sector productivity shock, exported output increases while non-traded output decreases, possibly reflecting the symptoms of the dutch disease. on the other hand, the dynamic responses of selected macroeconomic variables suggest the presence of the balassa-samuelson effect where an increase in productivity in the traded sector appreciates the real exchange rate and increases the prices of non-tradable goods through wage equalizations. overall, when the economy is experiencing commodity terms of trade shocks or exported productivity shocks, cpi inflation targeting is relatively better than exchange rate targeting and non-traded inflation targeting in macroeconomic stabilization.