Monetary Policy Response to Oil Price Shocks

Jean-Marc Natal

Journal of Money, Credit and Banking, 2012, vol. 44, issue 1, 53-101

Abstract: How should monetary authorities react to an oil price shock? This paper shows that in a noncompetitive economy, policies that perfectly stabilize prices entail large welfare costs, hence explaining the reluctance of policymakers to enforce them. The policy trade‐off is nontrivial because oil (energy) is an input to both production and consumption. As welfare‐maximizing policies are hard to implement and communicate, I derive a simple interest rate rule that depends only on observables but mimics the optimal plan in all dimensions. The optimal rule is hard on core inflation but accommodates oil price changes.

Date: 2012
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https://doi.org/10.1111/j.1538-4616.2011.00469.x

Related works:
Journal Article: Monetary Policy Response to Oil Price Shocks (2012)
Working Paper: Monerary Policy Response to Oil Price Shocks (2010)
Working Paper: Monetary policy response to oil price shocks (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:44:y:2012:i:1:p:53-101

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