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Optimal Pass-Through of Oil Prices in an Economy with Nominal Rigidities

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  • Hafedh Bouakez
  • Nooman Rebei
  • Désiré Vencatachellum

Abstract

In many developing and emerging market economies, governments intervene to limit the degree to which oil-price increases are passed through to domestic fuel prices. This paper investigates whether, and to what extent, this intervention is warranted in an oil-importing economy characterized by nominal rigidities in the goods and labor markets. Our results indicate that, to the extent that monetary policy is capable of stabilizing the economy, government intervention in the oil market must be avoided. On the other hand, when complete stabilization is not attainable as a result of sub-optimal monetary policy, the government can improve social welfare by limiting the degree of pass-through of oil prices. We find, however, that the welfare gain from pursuing such a policy is negligible.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0831.

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Date of creation: 2008
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Handle: RePEc:lvl:lacicr:0831

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Keywords: Oil prices; pass-through; government; monetary policy; small open economy; welfare;

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References

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Cited by:
  1. Jean Pierre Allegret & Mohamed Tahar Benkhodja, 2011. "External Shocks and Monetary Policy in a Small Open Oil Exporting Economy," EconomiX Working Papers 2011-39, University of Paris West - Nanterre la Défense, EconomiX.
  2. Mohamed Tahar Benkhodja, 2011. "Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy," Working Papers halshs-00654511, HAL.
  3. Sungbae An & Heedon Kang, 2011. "Oil Shocks in a DSGE Model for the Korean Economy," NBER Chapters, in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 295-321 National Bureau of Economic Research, Inc.
  4. Biing-Shen Kuo & Su-Ling Peng, 2011. "Price Pass-Through, Household Expenditure, and Industrial Structure: The Case of Taiwan," NBER Chapters, in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 237-255 National Bureau of Economic Research, Inc.
  5. Plante, Michael, 2011. "The long-run macroeconomic impacts of fuel subsidies in an oil-importing developing country," MPRA Paper 33823, University Library of Munich, Germany.

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