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

Andrea Ferrero () and Martin Seneca

No 13108, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The central bank of a commodity-exporting small open economy faces the traditional stabilization tradeoff between domestic inflation and output gap. The commodity sector introduces a terms-of-trade inefficiency that gives rise to an endogenous cost-push shock, changes the target level for output, reduces the slope of the Phillips curve, and increases the importance of stabilizing the output gap. Optimal monetary policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price inflation needs to raise interest rates to limit the inflationary impact of an exchange rate depreciation.

Keywords: monetary policy; oil export; small open economy (search for similar items in EconPapers)
JEL-codes: E52 E58 Q30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018-08
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Working Paper: Notes on the Underground: Monetary Policy in Resource-Rich Economies (2015) Downloads
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