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Oil Price Shocks and the Optimality of Monetary Policy

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  • Anna Kormilitsina

    ()
    (Southern Methodist University)

Abstract

The observed tightening of interest rates in the aftermath of the post-World War II oil price hikes led some to argue that U.S. monetary policy exacerbated the recessions induced by oil price shocks. This paper provides a critical evaluation of this claim. Within an estimated dynamic stochastic general equilibrium model with the demand for oil, I contrast Ramsey optimal with estimated monetary policy. I find that monetary policy amplified the negative effect of the oil price shock. The optimal response to the shock would have been to raise inflation and interest rates above what had been seen in the past.

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Bibliographic Info

Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0901.

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Date of creation: Jan 2009
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Handle: RePEc:smu:ecowpa:0901

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Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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Keywords: Oil price; Optimal monetary policy; DSGE model.;

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References

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Cited by:
  1. William T. Gavin & Benjamin D. Keen & Finn E. Kydland, 2013. "Monetary policy, the tax code, and the real effects of energy shocks," Working Papers 2013-019, Federal Reserve Bank of St. Louis.
  2. Jean‐Marc Natal, 2012. "Monetary Policy Response to Oil Price Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 53-101, 02.
  3. Vipin Arora & Pedro Gomis-Porqueras, 2011. "A Repayment Model of House Prices Oil Price Dynamics in a Real Business Cycle Model," Development Research Unit Working Paper Series 11-11, Monash University, Department of Economics.
  4. Carlo Rosa, 2013. "The high-frequency response of energy prices to monetary policy: understanding the empirical evidence," Staff Reports 598, Federal Reserve Bank of New York.
  5. Al-Abri, Almukhtar Saif, 2014. "Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective," Economic Modelling, Elsevier, vol. 36(C), pages 88-98.
  6. Taghizadeh Hesary Farhad & Naoyuki Yoshino, 2013. "Empirical Analysis of Oil Price Determination Based on Market Quality Theory," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-044, Keio/Kyoto Joint Global COE Program.
  7. James Bullard, 2011. "Measuring inflation: the core is rotten," Review, Federal Reserve Bank of St. Louis, issue July, pages 223-234.

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