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Monetary policy responses to oil price fluctuations

  • Bodenstein, Martin
  • Guerrieri, Luca
  • Kilian, Lutz

The recent volatility in global commodity prices and in the price of oil, in particular, has created renewed interest in the question of how monetary policy makers should respond to oil price fluctuations. In this paper, we discuss why this question is ill-posed and has no general answer. The central message of our analysis is that the best central bank policy response to oil price fluctuations depends on why the price of crude oil has changed. For example, an unexpected oil supply disruption in the Middle East calls for a different policy response than an unexpected increase in Chinese productivity or oil intensity. This means that policy makers need to disentangle the structural shocks that are jointly driving the price of oil and the macroeconomy and tailor their response to the observed mix of shocks. We use a multi-country DSGE model to quantify the appropriate policy responses and to analyze the optimal responses from a welfare point of view. We also reexamine the welfare gains from global monetary policy coordination in a world with trade in oil.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8928.

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Date of creation: Apr 2012
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Handle: RePEc:cpr:ceprdp:8928
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  1. Anna Kormilitsina, 2009. "Oil Price Shocks and the Optimality of Monetary Policy," Departmental Working Papers 0901, Southern Methodist University, Department of Economics.
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  10. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
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  19. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
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  25. Pedro A. Almoguera & Christopher C. Douglas & Ana María Herrera, 2011. "Testing for the cartel in OPEC: non-cooperative collusion or just non-cooperative?," Oxford Review of Economic Policy, Oxford University Press, vol. 27(1), pages 144-168, Spring.
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