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Monetary Policy in an Oil-Exporting Economy

Franz Hamann (), Jesus Bejarano (), Diego Rodriguez () and Paulina Restrepo-Echavarria

Review, 2016, vol. 98, issue 3, 239-61

Abstract: The sudden collapse of oil prices poses a challenge to inflation-targeting central banks in oil-exporting economies. In this article, the authors illustrate this challenge and conduct a quantitative assessment of the impact of changes in oil prices in a small open economy in which oil represents an important fraction of its exports. They build a monetary, three-sector, dynamic stochastic general equilibrium model and estimate it for the Colombian economy. They model the oil sector as an optimal resource extracting problem and show that in oil-exporting economies the macroeconomic effects vary according to the degree of persistence of oil price shocks. The main channels through which these shocks pass to the economy come from the real exchange rate, the country risk premium, and sluggish price adjustments. Inflation-targeting central banks in such economies face a policy dilemma: raise the policy rate to fight increased inflation coming from the exchange rate passthrough or lower it to stimulate a slowing economy.

JEL-codes: C61 E31 E37 E52 F41 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.20955/r.2016.239-261

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