Constraintson the Design and Implementation of Monetary Policy in Oil Economies

By definition, fiscal dominance impedes the effective implementation of any monetary strategy aimed at controlling inflation. Economies that exhibit oil dominance-a situation in which oil exports largely affect the main macroeconomic indicators-may also exhibit fiscal dominance. However, in this case, the standard indicators used to gauge the presence of fiscal dominance may fail to give the appropriate signals. The main purpose of this paper is twofold: i) to present a simple framework to analyze fiscal dominance in oil exporting countries and ii) to test the hypothesis of the presence of oil dominance/fiscal dominance (OD/FD) in the case of Venezuela. Using VAR and VEC models it is possible to conclude that there is relevant evidence supporting the validity of the OD/FD hypothesis.Oil exporting countries;Oil exports;monetary base, inflation, central bank, monetary policy, monetary fund, nominal variables, foreign exchange, inflation targeting, price stability, monetary impact, monetary control, price level, foreign currency, monetary expansion, monetary management, money supply, inflationary pressures, open market operations, independent monetary policy, money market, gdp deflator, effective exchange rates, inflation targeting framework, money markets, macroeconomic stability, inflation rate, optimal monetary policy, inflation rates, money growth, real variables, low inflation, monetary regime, terms of trade