Monetary policy of commodity-dependent economies

Abstract

This paper deals with the features of monetary policies of commodity-exporting and commodity-dependent economies, using methods of generalization of their instruments. The review of the monetary policy toolkit of advanced and emerging economies during the 2020–2021 pandemic demonstrates that central banks' reaction has been cautious in adopting asset purchase programs, often limiting their purchases to a smaller scale along with a narrow set of assets. Nevertheless, the application of credit support programs implemented in 2008 and a new set of credit programs for additional segments of the economy facilitated recovery.Central banks of emerging economies started raising key rates in 2021, and in 2022 advanced economies also began conducting tighter monetary policies to combat inflationary pressures of 2021–2022. The impact of the war in Ukraine on commodity markets exacerbated rising сommodity prices along with accommodative monetary policy, has led to stagflation in 2022. EU is among the most affected by inflation caused by the dependence on Russian oil and gas, and simultaneously by the recovery of internal demand after the pandemic. In the first half of 2022, the ECB’s monetary instruments remained asset purchases and lifting key rates. The risk of distracting monetary policy priorities from the green transition due to commodities price upturn is noted.For commodity-exporting emerging economies, shocks of raw materials prices become factors of business cycle fluctuations. The opportunities for effective monetary policy of commodity-exporting economies depend on exchange rate regimes and fiscal policy. The central bank's reaction to the rise in commodity prices is a tightening of monetary policy and a fall in prices – a weakening, suggesting that stabilizing output is more important than inflation targeting.The sharp decline in commodity prices from mid-2014 to early 2016 demanded significant fiscal adjustments and monetary policy tightening measures among commodity export-dependent economies. Compared to the oil crises of 1973 and 1979, today's oil price increase is relatively minor, the energy intensity of GDP is much less, and there is a price upturn in a much broader range of energy and agricultural commodities. Monetary goals and instruments are now much better defined due to the recognition of confidence as one of the monetary instruments in managing inflation expectations.