Notes on the Underground: Monetary Policy in Resource-Rich Economies

Andrea Ferrero and Martin Seneca

No 2015/02, Working Paper from Norges Bank

Abstract: How should monetary policy respond to a commodity price shock in a resource-rich economy? We study optimal monetary policy in a simple model of an oil exporting economy to provide a first answer to this question. The central bank faces a trade-off between the stabilization of domestic inflation and an appropriately defined output gap as in the reference New Keynesian model. But the welfare-relevant output gap depends on oil technology, and the weight on output stabilization is increasing in the size of the oil sector. Given substantial spillovers to the rest of the economy, optimal policy therefore calls for a reduction of the interest rate following a drop in the oil price in our model. In contrast, a central bank with a mandate to stabilize consumer price inflation may raise interest rates to limit the inflationary impact of an exchange rate depreciation.

Keywords: small open economy; oil export; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E58 J11 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2015-01-26
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Notes on the Underground: Monetary Policy in Resource‐Rich Economies (2019)
Working Paper: Notes on the Underground: Monetary Policy in Resource-Rich Economies (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2015_02

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