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Monetary Policy in Oil Exporting Economies

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  • Drago Bergholt

Abstract

How should monetary policy be constructed when national income depends on oil exports? I set up a general equilibrium model for an oil exporting small open economy to analyze this question. Fundamentals include an oil sector and domestic non-oil firms – some of which are linked to oil markets via supply chains. In the model, the intermediate production network implies transmission of international oil shocks to all domestic industries. The presence of wage and price rigidities at the sector level leads to non-trivial trade-offs between different stabilization tar- gets. I characterize Ramsey-optimal monetary policy in this environment, and use the framework to shed light on i) welfare implications of the supply chain channel, and ii) costs of alternative policy rules. Three results emerge: First, optimal policy puts high weight on nominal wage stability. In contrast, attempts to target impulses from the oil sector can be disastrous for welfare. Second, while oil sector activities contribute to macroeconomic fluctuations, they do not change the nature of optimal policy. Third, operational Taylor rules with high interest rate inertia can approximate the Ramsey equilibrium reasonably well.

Suggested Citation

  • Drago Bergholt, 2014. "Monetary Policy in Oil Exporting Economies," Working Papers No 5/2014, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  • Handle: RePEc:bny:wpaper:0023
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    Cited by:

    1. Samya Beidas-Strom & Marco Lorusso, 2019. "Macroeconomic Effects of Reforms on Three Diverse Oil Exporters: Russia, Saudi Arabia, and the UK," IMF Working Papers 2019/214, International Monetary Fund.
    2. Andrea Ferrero & Martin Seneca, 2019. "Notes on the Underground: Monetary Policy in Resource‐Rich Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(4), pages 953-976, June.
    3. Drechsel, Thomas & McLeay, Michael & Tenreyro, Silvana, 2019. "Monetary policy for commodity booms and busts," CEPR Discussion Papers 14030, C.E.P.R. Discussion Papers.
    4. Alberola, Enrique & Benigno, Gianluca, 2017. "Revisiting the commodity curse: A financial perspective," Journal of International Economics, Elsevier, vol. 108(S1), pages 87-106.
    5. Bergholt, Drago & Larsen, Vegard H. & Seneca, Martin, 2019. "Business cycles in an oil economy," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 283-303.
    6. 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.
    7. Omotosho, Babatunde S. & Tumala, Mohammed M., 2019. "A Text Mining Analysis of Central Bank Monetary Policy Communication in Nigeria," MPRA Paper 98850, University Library of Munich, Germany.
    8. Hansen, James & Gross, Isaac, 2018. "Commodity price volatility with endogenous natural resources," European Economic Review, Elsevier, vol. 101(C), pages 157-180.
    9. Omotosho, Babatunde S., 2020. "Central Bank Communication during Economic Recessions: Evidence from Nigeria," MPRA Paper 99655, University Library of Munich, Germany.
    10. 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.
    11. Kozlovtceva, Irina & Ponomarenko, Alexey & Sinyakov, Andrey & Tatarintsev, Stas, 2020. "A case for leaning against the wind in a commodity-exporting economy," International Economics, Elsevier, vol. 164(C), pages 86-114.
    12. Troug, Haytem, 2020. "The heterogeneity among commodity-rich economies: Beyond the prices of commodities," Journal of Macroeconomics, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    Monetary policy; oil exports; small open economy; Ramsey equilibrium; DSGE;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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