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

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Author Info
Hafedh Bouakez
Nooman Rebei
Désiré Vencatachellum

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

Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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