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Oil Price Shocks and the Optimality of Monetary Policy

  • Anna Kormilitsina

    ()

    (Southern Methodist University)

The observed tightening of interest rates in the aftermath of the post-World War II oil price hikes led some to argue that U.S. monetary policy exacerbated the recessions induced by oil price shocks. This paper provides a critical evaluation of this claim. Within an estimated dynamic stochastic general equilibrium model with the demand for oil, I contrast Ramsey optimal with estimated monetary policy. I find that monetary policy amplified the negative effect of the oil price shock. The optimal response to the shock would have been to raise inflation and interest rates above what had been seen in the past.

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Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0901.

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Date of creation: Jan 2009
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Handle: RePEc:smu:ecowpa:0901
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Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496

Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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