Optimal Monetary Responses to Oil Discoveries

Samuel Wills

No 1408, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: This paper studies how monetary policy should respond to news about an oil discovery, using a workhorse New Keynesian model. Good news about future production can create a recession today under exchange rate pegs and a simple Taylor rule, as seen in practice. This is explained by forward-looking inflation. Recession is avoided by a Taylor rule that accommodates changes in the natural level of output, which closely approximates optimal policy. Central banks have an incentive to exploit oil revenues by appreciating the terms of trade, creating “Dutch disease” and a deflationary bias which is overcome by committing to future policy.

Keywords: Natural Resources; Oil; Optimal Monetary Policy; Small Open Economy; News Shock (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 O13 Q30 Q33 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2012-10, Revised 2014-04
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.centreformacroeconomics.ac.uk/Discussio ... MDP2014-08-Paper.pdf Revised version, 2014 (application/pdf)

Related works:
Working Paper: Optimal Monetary Responses to Oil Discoveries (2014)
Working Paper: Optimal monetary responses to oil discoveries (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:1408

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