IDEAS home Printed from
   My bibliography  Save this paper

The oil price and monetary policy – a new paradigm


  • Amstad, Marlene
  • Hildebrand, Philipp


The oil price hit a low of around USD 10 at the end of 1999. Since then it has moved upwards in a series of steps. In recent years it has been one of the most closely monitored components of the Consumer Price Index (CPI), which is a leading inflation indicator. When it topped the USD 50 mark in October 2004 and in March 2005 and, even more clearly, when it passed USD 60 in mid-2005, it brought back painful memories of the severe economic consequences of the 1970s oil crisis. However, in real terms – after adjusting for inflation – the oil price is still lower now than it was then. Another striking factor is that between the mid 1980s and the turn of the millennium the oil price fluctuated around an average of about USD 20. Since then, the average price level and volatility have greatly increased. Although a few years do not provide sufficient evidence to validate a trend, they do raise questions about the background to the oil price hike and its implications for monetary policy. This paper looks at the fundamental factors which suggest that oil prices are likely to remain both high and volatile. It also discusses the implications for monetary policy. Since maintaining price stability is the principal objective of monetary policy, this paper focuses primarily on the impact of oil prices on inflation; the effects on growth are considered insofar as they affect inflation. Section 2 outlines some of the reasons why oil prices are expected to remain high and volatile. Section 3 looks at forecasting oil prices while Section 4 outlines the possible implications of higher oil prices for economic growth and inflation. Finally, Section 5 examines the monetary policy implications of sustained high oil prices. The final section presents our conclusions.

Suggested Citation

  • Amstad, Marlene & Hildebrand, Philipp, 2005. "The oil price and monetary policy – a new paradigm," MPRA Paper 15562, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:15562

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    2. Benjamin Hunt & Peter Isard & Douglas Laxton, 2002. "The Macroeconomic Effects of Higher Oil Prices," National Institute Economic Review, National Institute of Economic and Social Research, vol. 179(1), pages 87-103, January.
    3. Mark A. Hooker, 1999. "Are oil shocks inflationary? Asymmetric and nonlinear specifications versus changes in regime," Finance and Economics Discussion Series 1999-65, Board of Governors of the Federal Reserve System (U.S.).
    4. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    5. Joseph G. Haubrich & Patrick C. Higgins & Janet Miller, 2004. "Oil prices: backward to the future?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
    6. Rebeca Jimenez-Rodriguez & Marcelo Sanchez, 2005. "Oil price shocks and real GDP growth: empirical evidence for some OECD countries," Applied Economics, Taylor & Francis Journals, vol. 37(2), pages 201-228.
    Full references (including those not matched with items on IDEAS)

    More about this item


    oil price; monetary policy;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:15562. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.