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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. (Copyright: Elsevier)

Suggested Citation

  • Anna Kormilitsina, 2011. "Oil Price Shocks and the Optimality of Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 199-223, January.
    • Handle: RePEc:red:issued:09-106
    DOI: 10.1016/j.red.2010.11.001
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    More about this item

    Keywords

    Oil prices; Optimal monetary policy; DSGE model;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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