Oil price shocks, optimal policy rules and labor market heterogeneity in Arab oil rich economies

The purpose of this project is to investigate the optimal monetary policy framework for the resource-rich Arab countries. The research attempts to address several novel questions. The first is to determine what the most appropriate monetary policy, in general, and exchange rate regimes, in particular, are appropriate given the exposure to oil price fluctuations and increasing levels of trade and financial openness. Second, the research introduces the role of labor market heterogeneity in determining the choice of the exchange rate regime. In particular, the paper intends to assess to what extent labor market flexibility in different Arab countries with different characteristics of labor markets (through the elasticity of labor supply) can substitute for exchange rate flexibility as a mechanism of adjustment to oil price shocks.