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Oil Price Shocks and Monetary Policy in an Asymmetric Monetary Union

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  • Wohltmann, Hans-Werner
  • Clausen, Volker

Abstract

This paper analyzes the dynamic effects of anticipated and unanticipated oil price increases in a small two-country monetary union, which is simultaneously characterized by asymmetric wage adjustments and asymmetric interest rate sensitivities of private absorption. It is shown that both types of oil price disturbances lead to temporary divergences in output developments across the monetary union. In the case of anticipated oil price increases the relative cyclical position of output effects is reversed in the course of the adjustment process. With anticipated oil price increases complete stabilization of the output variables throughout the overall adjustment process requires restrictive monetary policy to be time-inconsistent from a quantitative but time-consistent from a qualitative point of view. That means that the central bank credibly announces a future reduction in the growth rate of nominal money stock but actually realizes a decrease in the monetary growth rate, which is less restrictive than the announcement.

Suggested Citation

  • Wohltmann, Hans-Werner & Clausen, Volker, 2003. "Oil Price Shocks and Monetary Policy in an Asymmetric Monetary Union," Economics Working Papers 2003-11, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:1121
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    File URL: https://www.econstor.eu/bitstream/10419/21976/1/EWP-2003-11.pdf
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    References listed on IDEAS

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    1. Willem H. Buiter & Marcus Miller, 1991. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 239-277 National Bureau of Economic Research, Inc.
    2. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, March.
    3. Wohltmann, Hans-Werner & Clausen, Volker, 2002. "Foreign price shocks and monetary policy in an asymmetric monetary union," IBES Diskussionsbeiträge 124, University of Duisburg-Essen, Institute of Business and Economic Studie (IBES).
    4. Wohltmann Hans-Wemer & Bulthaupt Frank, 1999. "Intertemporale Output- und Beschäftigungseffekte angebotsorientierter Politikmaßnahmen in einer Währungsunion / Short- and Long-run Effects of Supply Side Policies within a Currency Union," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 218(1-2), pages 1-22, February.
    5. Stephen G. Cecchetti, 1999. "Legal structure, financial structure, and the monetary policy transmission mechanism," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-28.
    6. Buiter, Willem H, 1978. "Short-run and Long-run Effects of External Disturbances under a Floating Exchange Rate," Economica, London School of Economics and Political Science, vol. 45(179), pages 251-272, August.
    7. Clausen, Volker & Wohltmann, Hans-Werner, 2005. "Monetary and fiscal policy dynamics in an asymmetric monetary union," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 139-167, February.
    8. Ronald E. Findlay & Carlos Alfredo Rodriguez, 1977. "Intermediate Imports and Macroeconomic Policy under Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 208-217, May.
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    10. Devereux, Michael B. & Purvis, Douglas D., 1990. "Fiscal policy and the real exchange rate," European Economic Review, Elsevier, vol. 34(6), pages 1201-1211, September.
    11. Buiter, Willem H, 1984. "Saddlepoint Problems in Continuous Time Rational Expectations Models: A General Method and Some Macroeconomic Examples," Econometrica, Econometric Society, vol. 52(3), pages 665-680, May.
    12. Bhandari, Jagdeep S. & Turnovsky, Stephen J., 1984. "Materials price increases and aggregate adjustment in an open economy : A Stochastic Approach," European Economic Review, Elsevier, vol. 25(2), pages 151-182, July.
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    Cited by:

    1. Clausen Volker & Wohltmann Hans-Werner, 2013. "Oil Price Dynamics and Monetary Policy in a Heterogeneous Monetary Union," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(2), pages 159-187, April.

    More about this item

    Keywords

    EMU; international policy transmission; oil price shock; time inconsistency;

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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