EconPapers    
Economics at your fingertips  
 

Optimal monetary responses to oil discoveries

Samuel Wills ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper studies how monetary policy should respond to news about an oil discovery, using a workhorse New Keynesian model. Good news about future production can create a recession today under exchange rate pegs and a simple Taylor rule, as seen in practice. This is explained by forward-looking inflation. Recession is avoided by a Taylor rule that accommodates changes in the natural level of output, which closely approximates optimal policy. Central banks have an incentive to exploit oil revenues by appreciating the terms of trade, creating “Dutch disease” and a deflationary bias which is overcome by committing to future policy.

Keywords: natural resources; oil; optimal monetary policy; small open economy; news shock (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 O13 Q30 Q33 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2014-04
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mac, nep-mon and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://eprints.lse.ac.uk/58104/ Open access version. (application/pdf)

Related works:
Working Paper: Optimal Monetary Responses to Oil Discoveries (2014) Downloads
Working Paper: Optimal Monetary Responses to Oil Discoveries (2014) Downloads
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:ehl:lserod:58104

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().

 
Page updated 2021-03-28
Handle: RePEc:ehl:lserod:58104