The oil price and monetary policy – a new paradigm
AbstractThe oil price hit a low of around USD 10 at the end of 1999. Since then it has moved upwards in a series of steps. In recent years it has been one of the most closely monitored components of the Consumer Price Index (CPI), which is a leading inflation indicator. When it topped the USD 50 mark in October 2004 and in March 2005 and, even more clearly, when it passed USD 60 in mid-2005, it brought back painful memories of the severe economic consequences of the 1970s oil crisis. However, in real terms – after adjusting for inflation – the oil price is still lower now than it was then. Another striking factor is that between the mid 1980s and the turn of the millennium the oil price fluctuated around an average of about USD 20. Since then, the average price level and volatility have greatly increased. Although a few years do not provide sufficient evidence to validate a trend, they do raise questions about the background to the oil price hike and its implications for monetary policy. This paper looks at the fundamental factors which suggest that oil prices are likely to remain both high and volatile. It also discusses the implications for monetary policy. Since maintaining price stability is the principal objective of monetary policy, this paper focuses primarily on the impact of oil prices on inflation; the effects on growth are considered insofar as they affect inflation. Section 2 outlines some of the reasons why oil prices are expected to remain high and volatile. Section 3 looks at forecasting oil prices while Section 4 outlines the possible implications of higher oil prices for economic growth and inflation. Finally, Section 5 examines the monetary policy implications of sustained high oil prices. The final section presents our conclusions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 15562.
Date of creation: Oct 2005
Date of revision:
oil price; monetary policy;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997.
"Systematic Monetary Policy and the Effects of Oil Price Shocks,"
97-25, C.V. Starr Center for Applied Economics, New York University.
- Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
- James D. Hamilton, 2000.
"What is an Oil Shock?,"
NBER Working Papers
7755, National Bureau of Economic Research, Inc.
- Rebeca Jiménez-Rodríguez & Marcelo Sánchez, 2004. "Oil price shocks and real GDP growth: empirical evidence for some OECD countries," Working Paper Series 362, European Central Bank.
- Peter Isard & Ben Hunt & Douglas Laxton, 2001. "The Macroeconomic Effects of Higher Oil Prices," IMF Working Papers 01/14, International Monetary Fund.
- Joseph G. Haubrich & Patrick Higgins & Janet Miller, 2004. "Oil prices: backward to the future?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.