Alternative Exchange Rate Systems for Oil-Exporting Countries: Frankel’s Currency-Plus-Commodity Basket Proposal versus the Current System

Abstract

Choosing an appropriate exchange rate regime is crucial for economic policy, particularly for developing countries seeking to establish robust macroeconomic frameworks to mitigate external shocks. However, such nations, including those reliant on oil and natural gas exports, often face challenges in selecting suitable regimes, exacerbated by a lack of traditional advice. The debate around this issue intensified in the aftermath of the 2014 oil price decline. In response, Jeffrey Frankel proposed the currency-plus-commodity basket (CCB) arrangement in 2017, blending the benefits of floating and pegging. This study applies the CCB system to Algeria, aiming to evaluate its impact compared to the current managed floating regime from 2001 to 2021, on indicators of internal (inflation rates) and external (change in foreign exchange reserves) balance using monthly data. Employing wavelet analysis and robustness tests, specifically quantile-on-quantile regression (QQR), the findings suggest that the CCB regime surpasses managed floating in maintaining monetary stability and achieving internal and external balance. Moreover, it provides greater flexibility and stimulates the domestic economy through its ability to stabilize terms of trade via active countercyclical monetary policy. Nonetheless, further discussion, adjustment, experimentation, and development of the proposed regime are warranted.

Keywords

• exchange rate system
• currency-plus-commodity basket
• wavelet analysis
• quantile-on-quantile regression
• inflation rates
• foreign exchange reserves
• algeria