The Currency-plus-Commodity Basket
The Currency-plus-Commodity Basket
A Proposal for Exchange Rates in Oil-Exporting Countries to Accommodate Trade Shocks Automatically
This chapter proposes an exchange rate regime for oil-exporting countries, designed to deliver monetary policy that accommodates rather than exacerbates the effects of oil market swings, yet offers the transparency and predictability of a currency peg. The proposal is called currency-plus-commodity basket (CCB). The plan is to peg the national currency to a basket that includes not only the currencies of major trading partners but also the export commodity (oil). The chapter provides evidence from six Gulf Cooperation Council (GCC) countries that times when their currencies were “undervalued” relative to the CCB alternative were periods of overheating, as reflected in high inflation, and external imbalance, as reflected in high balance-of-payments surpluses. Conversely, periods when the currencies were “overvalued” featured unusually low inflation and low balance of payments. This suggests the economy would have been more stable under CCB. Finally, the chapter offers a practical blueprint for implementation of the proposal.
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