Monetary Policy in Oil Exporting Economies

Drago Bergholt

No No 5/2014, Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School

Abstract: How should monetary policy be constructed when national income depends on oil exports? I set up a general equilibrium model for an oil exporting small open economy to analyze this question. Fundamentals include an oil sector and domestic non-oil firms some of which are linked to oil markets via supply chains. In the model, the intermediate production network implies transmission of international oil shocks to all domestic industries. The presence of wage and price rigidities at the sector level leads to non-trivial trade-offs between different stabilization tar- gets. I characterize Ramsey-optimal monetary policy in this environment, and use the framework to shed light on i) welfare implications of the supply chain channel, and ii) costs of alternative policy rules. Three results emerge: First, optimal policy puts high weight on nominal wage stability. In contrast, attempts to target impulses from the oil sector can be disastrous for welfare. Second, while oil sector activities contribute to macroeconomic fluctuations, they do not change the nature of optimal policy. Third, operational Taylor rules with high interest rate inertia can approximate the Ramsey equilibrium reasonably well.

Keywords: Monetary policy; oil exports; small open economy; Ramsey equilibrium; DSGE (search for similar items in EconPapers)
JEL-codes: E52 F41 Q33 Q43 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2014-07
New Economics Papers: this item is included in nep-cba, nep-dge, 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 (21)

Downloads: (external link)
https://www.bi.edu/globalassets/forskning/camp/wor ... king_camp_5-2014.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bny:wpaper:0023

Access Statistics for this paper

More papers in Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School Contact information at EDIRC.
Bibliographic data for series maintained by Helene Olsen ().