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Notes on the Underground: Monetary Policy in Resource-Rich Economies

Author

Listed:
  • Andrea Ferrero
  • Martin Seneca

Abstract

How should monetary policy respond to a commodity price shock in a resource-rich economy? As in the baseline New Keynesian model, the central bank of a small oil-exporting economy faces a tradeoff, between the stabilization of domestic infl ation and an appropriately defined output gap. But in our framework the output gap depends on oil technology, and the weight on output gap stabilization is increasing in the importance of the oil sector. Given substantial spillovers to the rest of the economy, optimal policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price infl ation would raise interest rates to limit the infl ationary impact of an exchange rate depreciation.

Suggested Citation

  • Andrea Ferrero & Martin Seneca, 2015. "Notes on the Underground: Monetary Policy in Resource-Rich Economies," OxCarre Working Papers 158, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:158
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    File URL: https://www.economics.ox.ac.uk/materials/OxCarre/ResearchPapers/OxCarreRP2015158.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. van der Ploeg, Frederick, 2016. "Macro Policy Responses to Natural Resource Windfalls and the Crash in Commodity Prices," CEPR Discussion Papers 11520, C.E.P.R. Discussion Papers.
    2. Melina, Giovanni & Yang, Shu-Chun S. & Zanna, Luis-Felipe, 2016. "Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model," Economic Modelling, Elsevier, vol. 52(PB), pages 630-649.
    3. repec:eee:jimfin:v:96:y:2019:i:c:p:283-303 is not listed on IDEAS
    4. 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.
    5. Malova, Aleksandra & van der Ploeg, Frederick, 2017. "Consequences of lower oil prices and stranded assets for Russia's sustainable fiscal stance," Energy Policy, Elsevier, vol. 105(C), pages 27-40.

    More about this item

    Keywords

    small open economy; oil export; monetary policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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