Macroeconomic Stabilization under FX Scarcity

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Abstract
A fall in commodity receipts can contract domestic production when firms rely on imported inputs and foreign exchange is rationed at a stabilized exchange rate. We study this mechanism in a small open economy calibrated to Trinidad and Tobago. Energy prices and energy-sector activity follow their observed quarterly paths through 2018Q4, with each realization entering agents' information set when it occurs. The model links productive-import availability to energy receipts and official reserves and allows for downward nominal wage rigidity. Fiscal programs and targeted FX sales are compared at a common initial scale.When a quarter-5 fiscal program is revealed as disbursement begins, public investment generates the largest cumulative response among the fiscal instruments. Announcing the same program in quarter 1 sharply reduces its effectiveness: in the benchmark model, the twenty-quarter responses of public consumption and public investment turn negative. The sign reversal survives with flexible wages, so anticipation and expected input scarcity are sufficient to generate it. Targeted FX provision raises output by relaxing the productive constraint directly, while rebuilding reserves withdraws part of the initial support later. Average output returns to FX provision decline with program size. Downward nominal wage rigidity cushions the initial contraction but leaves average non-energy output over the first twenty quarters 1.04 percentage points lower than under flexible wages. A first-order approximation preserves the main fiscal ranking and the announcement penalty, but some FX-policy effects are sensitive to local approximation.

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