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Monetary Policy in Oil Exporting Economies

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  • Drago Bergholt

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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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    File URL: https://www.bi.edu/globalassets/forskning/camp/working-papers/2014/working_camp_5-2014.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Alberola, Enrique & Benigno, Gianluca, 2017. "Revisiting the commodity curse: A financial perspective," Journal of International Economics, Elsevier, vol. 108(S1), pages 87-106.
    2. repec:eee:eecrev:v:101:y:2018:i:c:p:157-180 is not listed on IDEAS
    3. Drago Bergholt & Vegard H Larsen & Martin Seneca, 2017. "Business cycles in an oil economy," BIS Working Papers 618, Bank for International Settlements.

    More about this item

    Keywords

    Monetary policy; oil exports; small open economy; Ramsey equilibrium; DSGE;

    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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