Oil Price Shocks and the Optimality of Monetary Policy

Anna Kormilitsina ()

Review of Economic Dynamics, 2011, vol. 14, issue 1, 199-223

Abstract: 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. (Copyright: Elsevier)

Keywords: Oil prices; Optimal monetary policy; DSGE model (search for similar items in EconPapers)
JEL-codes: C68 E52 Q43 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (68)

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DOI: 10.1016/j.red.2010.11.001

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