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Oil Price Shocks and Exchange Rate Management: The Implications of Consumer Durables for the Small Open Economy

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Author Info

  • Michael Plante

    () (Indiana University Bloomington)

Abstract

This 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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File URL: http://www.iub.edu/~caepr/RePEc/PDF/2008/CAEPR2008-007.pdf
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Bibliographic Info

Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2008-007.

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Length: 45 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:inu:caeprp:2008-007

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Keywords: oil; durables; exchange rates;

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