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Monetary Policy in an Oil-Exporting Economy

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Abstract

The sudden collapse of oil prices poses a challenge to inflation-targeting central banks in oil-exporting economies. In this article, the authors illustrate this challenge and conduct a quantitative assessment of the impact of changes in oil prices in a small open economy in which oil represents an important fraction of its exports. They build a monetary, three-sector, dynamic stochastic general equilibrium model and estimate it for the Colombian economy. They model the oil sector as an optimal resource extracting problem and show that in oil-exporting economies the macroeconomic effects vary according to the degree of persistence of oil price shocks. The main channels through which these shocks pass to the economy come from the real exchange rate, the country risk premium, and sluggish price adjustments. Inflation-targeting central banks in such economies face a policy dilemma: raise the policy rate to fight increased inflation coming from the exchange rate passthrough or lower it to stimulate a slowing economy.

Suggested Citation

  • Jesús Bejarano & Franz Hamann & Paulina Restrepo-Echavarria & Diego Rodríguez, 2016. "Monetary Policy in an Oil-Exporting Economy," Review, Federal Reserve Bank of St. Louis, vol. 98(3), pages 239-261.
  • Handle: RePEc:fip:fedlrv:00063
    DOI: 10.20955/r.2016.239-261
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    References listed on IDEAS

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    Cited by:

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    2. Irina Kozlovtceva & Alexey Ponomarenko & Andrey Sinyakov & Stas Tatarintsev, 2019. "Financial Stability Implications of Policy Mix in a Small Open Commodity-Exporting Economy," Bank of Russia Working Paper Series wps42, Bank of Russia.
    3. Yildirim, Zekeriya & Guloglu, Hasan, 2024. "Macro-financial transmission of global oil shocks to BRIC countries — International financial (uncertainty) conditions matter," Energy, Elsevier, vol. 306(C).
    4. Joab Dan VALDIVIA CORIA & Daney David VALDIVIA CORIA, 2017. "Impulse on the Aggregate Demand in Bolivia through the Coordination of the Monetary and Fiscal Policy in Crisis Time," Journal of Economics Bibliography, KSP Journals, vol. 4(2), pages 156-173, June.
    5. Tibor Hledik & Karel Musil & Jakub Rysanek & Jaromir Tonner, 2018. "A Macroeconomic Forecasting Model of the Fixed Exchange Rate Regime for the Oil-Rich Kazakh Economy," Working Papers 2018/11, Czech National Bank, Research and Statistics Department.
    6. FrIrina Kozlovtceva & Alexey Ponomarenko & Andrey Sinyakov & Stas Tatarintsev, 2020. "A case for leaning against the wind in a commodity-exporting economy," International Economics, CEPII research center, issue 164, pages 86-114.
    7. Ivan Khotulev & Konstantin Styrin, 2020. "Optimal Monetary and Macroprudential Policies for Financial Stability in a Commodity-Exporting Economy," Russian Journal of Money and Finance, Bank of Russia, vol. 79(2), pages 3-42, June.
    8. Ni, Yinan & Barth, James R. & Sun, Yanfei, 2022. "On the dynamic capital structure of nations: Theory and empirics," Research in International Business and Finance, Elsevier, vol. 62(C).

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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