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Monetary policy responses to oil price fluctuations

Listed author(s):
  • 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
Handle: RePEc:cpr:ceprdp:8928
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  1. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February.
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  4. Alquist, Ron & Kilian, Lutz, 2007. "What Do We Learn from the Price of Crude Oil Futures?," CEPR Discussion Papers 6548, C.E.P.R. Discussion Papers.
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  13. Christopher Erceg & Luca Guerrieri & Steven B. Kamin, 2011. "Did Easy Money in the Dollar Bloc Fuel the Oil Price Run-Up?," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 131-160, March.
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  18. Rajeev Dhawan & Karsten Jeske, 2007. "Taylor rules with headline inflation: a bad idea," FRB Atlanta Working Paper 2007-14, Federal Reserve Bank of Atlanta.
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  20. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 781-808, May.
  21. Anna Kormilitsina, 2009. "Oil Price Shocks and the Optimality of Monetary Policy," Departmental Working Papers 0901, Southern Methodist University, Department of Economics.
  22. Carlos Montoro, 2010. "Oil shocks and optimal monetary policy," BIS Working Papers 307, Bank for International Settlements.
  23. 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.
  24. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1, September.
  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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