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Cover -- Contents -- ABSTRACT -- I. INTRODUCTION -- II. THEORETICAL CHANNELS AND EXISTING RELEVANT LITERATURE -- A. The Role of the Exchange Rate -- B. The Role of Fiscal Policy -- III. EMPIRICAL SECTION -- A. Sample -- B. Current Account Balance Regressions -- C. Trade balance Regressions -- D. Robustness Checks -- IV. CONCLUSION -- References -- Figure -- 1. External Balance, Fiscal Policy and Exchange Rate, 1995-2014 -- Tables -- 1. Oil Exporters: Keys Characteristics -- 2. Long-run Price Elasticities of Trade Volumes -- 3. Current Account Balance Regressions

While the underlying methodologies continue to be widely debated and refined, there is little consensus on how to assess the equilibrium exchange rate of economies dominated by production of finite natural resources such as the oil economies of the Middle East. In part this is due to the importance of intertemporal aspects (as the real exchange rate may affect the optimal/equitable rate of transformation of finite resource wealth into financial assets), as well as risk considerations given the relatively high volatility of commodity prices. The paper illustrates some important peculiarities of

This essay tests the hypotheses and claims of models of internationalization that draw on neo-classical trade theory. Using the influential Frieden-Rogowski model, it examines the responses of Iraq and Algeria to the oil price shocks of the 1980s and 1990s. The cases demonstrate that even the most basic assumptions and predictions of this economistic model are flawed. The Frieden-Rogowski model misrepresents the mechanisms through which price shocks are translated into policy, makes inaccurate predictions about how terms of trade affect policy or sectoral performance, fails to explain the duration of lags between price changes and policy changes, and neglects important differences in a variety of major outcomes. I argue that even in the very similar cases of Algeria and Iraq, policy changed not in response to domestic pressures generated from changes in relative prices, but as a result of a severe fiscal crisis that stripped both governments of their ability to protect domestic constituents from world prices.