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Yemen: Exchange Rate Policy in the Face of Dwindling Oil Exports
Author:
Todd Schneider
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,
Nabil Ben Ltaifa
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,
Mr. Faisal Ahmed
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Mr. Saade Chami
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Series:
IMF Working Papers
Volume/Issue:
Volume 2007: Issue 005
Language:
English
Publication Date:
01 Jan 2007
DOI:
https://doi.org/10.5089/9781451865691.001
ISBN:
9781451865691
ISSN:
1018-5941
Pages:
22
Keywords:
WP; exchange rate; crawling peg; Yemen; depreciation; Exchange rates; adjustment process; oil; equilibrium exchange rate; exchange rate depreciation; regime in the form; developments in Yemen; crawling peg exchange regime; exchange rate development; band in an effort; nominal exchange rate; real effective exchange rate; exchange rate pass-through effect; exchange rate band; crawling peg regime; Real exchange rates; Real effective exchange rates; Oil production; Exchange rate arrangements; Africa; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper investigates the likely implications of declining oil production on Yemen's equilibrium exchange rate, and discusses policy options to ensure a smooth transition to a nonoil economy. The empirical results suggest that, as oil production and foreign exchange earnings fall, the Yemeni rial will have to adjust downward in real effective terms to keep pace with the equilibrium exchange rate. In light of strong pass-through from exchange rate depreciation to domestic inflation, this could entail a substantial depreciation in nominal terms. Given the nature of the adjustment, a floating exchange rate regime appears to be the best option, if supported by appropriate macroeconomic policies. However, given public fixation on a exchange rate stability, a softly managed float would be a better option for Yemen whereby the central bank may have to lead the market toward the equilibrium exchange rate.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund