Abstract: There is ample consensus that monetary policy plays a key role in fostering economic growth and avoiding the costs of chronic inflation. Prudential and transparent monetary policies –in conjunction with budget-balanced fiscal policies—are universally recommended as a sound macroeconomic stance. While these recommendations may have general validity for nonresource based economies, their applicability to resource-rich economies is unclear. Resourcerich countries will not be disciplined by these constraints. On one hand, government financing is hardly a limitation when resources are abundant and countercyclical fiscal policy is often unavailable. On the other hand, because resource-based economies are quite sensitive to fluctuations in commodity prices, exchange rate and monetary policy often fail to stabilize the economy when needed. This paper explores and quantifies the role of monetary policy on economic performance in resource-based economies, with a particular focus on Middle East economies. We consider two dimensions of performance: long-run economic growth and price instability (inflation). A crucial component in our study is to assess the role of exchange rate regimes and their interplay with monetary and fiscal policies. To our knowledge, economic research has largely neglected the impact of the choice of exchange rate regimes and the conduct of monetary policy on economic performance in resource based economies.
Keywords: Monetary Policy, Growth, Inflation, Resource Dependent Economies
JEL: O13, O23, O47