Oil Price Shocks and Exchange Rate Management: The Implications of Consumer Durables for the Small Open Economy
AbstractThis paper examines exchange rate management issues when a small open economy is hit by an exogenous oil price shock. In this model consumer durables play an important role in the demand for oil and oil based products as opposed to the traditional role of oil as a factor of production. When prices are sticky, oil price shocks lead to reduced output, lower inflation, and real exchange rate deprecation. These recessionary effects occur whether or not oil is in the production function because of the close relationship between consumer durables and oil. Tentative results suggest that flexible exchange rates produce smaller output losses and less volatile inflation in the non-tradables sector than fixed exchange rates but at the cost of front-loading real exchange rate movements.
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Bibliographic InfoPaper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2008-007.
Length: 45 pages
Date of creation: Apr 2008
Date of revision:
oil; durables; exchange rates;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-21 (All new papers)
- NEP-CBA-2008-04-21 (Central Banking)
- NEP-ENE-2008-04-21 (Energy Economics)
- NEP-IFN-2008-04-21 (International Finance)
- NEP-MAC-2008-04-21 (Macroeconomics)
- NEP-OPM-2008-04-21 (Open Economy Macroeconomic)
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- Ogundipe, Adeyemi & Ogundipe, Oluwatomisin, 2013. "Oil Price and Exchange Rate Volatility in Nigeria," MPRA Paper 51668, University Library of Munich, Germany.
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