Fiscal stress and monetary policy stance in oil-exporting countries

Abstract We documented that for some oil-exporting countries, the correlation between exchange rates and oil prices is strongly negative during periods of significant price drop but much weaker other periods. To interpret this time-varying asymmetric correlation, we develop estimate a Markov-switching small open economy New Keynesian model with income as source government revenue. In particular, allow monetary fiscal policy coefficients to switch across “active” “passive” regimes. Using data on Russia, our result shows combinations fluctuate. find active isolates rate from variations changes passively tolerate depreciation inflation support debt when drops place in state stress. Counterfactual experiments suggest regime switching crucial account observed impact transmission channels shocks differ significantly