Abstract

http://ssrn.com/abstract=1118909
 
 

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Oil Price Shocks and Exchange Rate Management: The Implications of Consumer Durables for the Small Open Economy


Michael Plante


Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

April 10, 2008

CAEPR Working Paper No. 2008-007

Abstract:     
This paper examines exchange rate management issues when a small open economy is hit by an exogenous oil price shock. In this model consumer durables play an important role in the demand for oil and oil based products as opposed to the traditional role of oil as a factor of production. When prices are sticky, oil price shocks lead to reduced output, lower inflation, and real exchange rate deprecation. The output losses occur whether or not oil is in the production function because of the close relationship between consumer durables and oil. Tentative results suggest that flexible exchange rates produce smaller output losses and less volatile inflation in the non-tradables sector than fixed exchange rates but at the cost of front-loading real exchange rate movements.

Number of Pages in PDF File: 45

Keywords: oil, durables, exchange rates

JEL Classification: E31, F41, E52


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Date posted: April 11, 2008 ; Last revised: June 27, 2008

Suggested Citation

Plante, Michael, Oil Price Shocks and Exchange Rate Management: The Implications of Consumer Durables for the Small Open Economy (April 10, 2008). CAEPR Working Paper No. 2008-007. Available at SSRN: http://ssrn.com/abstract=1118909 or http://dx.doi.org/10.2139/ssrn.1118909

Contact Information

Center for Applied Economics And Policy Research (Contact Author)
Indiana University Bloomington - Department of Economics
Wylie Hall
Bloomington, IN 47405-6620
United States
Michael D. Plante
Federal Reserve Bank of Dallas ( email )
2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )
100 South Woodlawn Avenue, Wylie Hall 250
Bloomington, IN 47405-1704
United States
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