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Optimal Pass-Through of Oil Prices in an Economy with Nominal Rigidities

Author

Listed:
  • Hafedh Bouakez
  • Nooman Rebei
  • Désiré Vencatachellum

Abstract

In many developing and emerging market economies, governments intervene to limit the degree to which oil-price increases are passed through to domestic fuel prices. This paper investigates whether, and to what extent, this intervention is warranted in an oil-importing economy characterized by nominal rigidities in the goods and labor markets. Our results indicate that, to the extent that monetary policy is capable of stabilizing the economy, government intervention in the oil market must be avoided. On the other hand, when complete stabilization is not attainable as a result of sub-optimal monetary policy, the government can improve social welfare by limiting the degree of pass-through of oil prices. We find, however, that the welfare gain from pursuing such a policy is negligible.

Suggested Citation

  • Hafedh Bouakez & Nooman Rebei & Désiré Vencatachellum, 2008. "Optimal Pass-Through of Oil Prices in an Economy with Nominal Rigidities," Cahiers de recherche 0831, CIRPEE.
  • Handle: RePEc:lvl:lacicr:0831
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mohamed Tahar Benkhodja, 2014. "Monetary policy and the Dutch disease effect in an oil exporting economy," International Economics, CEPII research center, issue 138, pages 78-102.
    2. Semko Roman, 2013. "Optimal economic policy and oil prices shocks in Russia," EERC Working Paper Series 13/03e, EERC Research Network, Russia and CIS.
    3. Allegret, Jean Pierre & Benkhodja, Mohamed Tahar, 2015. "External shocks and monetary policy in an oil exporting economy (Algeria)," Journal of Policy Modeling, Elsevier, vol. 37(4), pages 652-667.
    4. Plante, Michael, 2011. "The long-run macroeconomic impacts of fuel subsidies in an oil-importing developing country," MPRA Paper 33823, University Library of Munich, Germany.
    5. Sungbae An & Heedon Kang, 2011. "Oil Shocks in a DSGE Model for the Korean Economy," NBER Chapters,in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 295-321 National Bureau of Economic Research, Inc.
    6. Mohamed Tahar Benkhodja, 2011. "Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy," Working Papers halshs-00654511, HAL.
    7. Jean Pierre Allegret & Mohamed Tahar Benkhodja, 2011. "External Shocks and Monetary Policy in a Small Open Oil Exporting Economy," EconomiX Working Papers 2011-39, University of Paris Nanterre, EconomiX.
    8. Liu, Qing & Shi, Kang & Wu, Zhouheng & Xu, Juanyi, 2014. "Oil price stabilization and global welfare," Journal of Development Economics, Elsevier, vol. 111(C), pages 246-260.
    9. Biing-Shen Kuo & Su-Ling Peng, 2011. "Price Pass-Through, Household Expenditure, and Industrial Structure: The Case of Taiwan," NBER Chapters,in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 237-255 National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Oil prices; pass-through; government; monetary policy; small open economy; welfare;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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