Monetary Policy in an Oil-Exporting Economy

24 Pages Posted: 15 Sep 2016 Last revised: 17 Jul 2019

See all articles by Franz Hamann

Franz Hamann

Central Bank of Colombia

Jesús Bejarano

Central Bank of Columbia

Diego Rodríguez

Banco de la República, Colombia

Paulina Restrepo-Echavarria

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: 2016

Abstract

The sudden collapse of oil prices poses a challenge to inflation-targeting central banks in oil-exporting economies. In this article, the authors illustrate this challenge and conduct a quantitative assessment of the impact of changes in oil prices in a small open economy in which oil represents an important fraction of its exports. They build a monetary, three-sector, dynamic stochastic general equilibrium model and estimate it for the Colombian economy. They model the oil sector as an optimal resource extracting problem and show that in oil-exporting economies the macroeconomic effects vary according to the degree of persistence of oil price shocks. The main channels through which these shocks pass to the economy come from the real exchange rate, the country risk premium, and sluggish price adjustments. Inflation-targeting central banks in such economies face a policy dilemma: raise the policy rate to fight increased inflation coming from the exchange rate passthrough or lower it to stimulate a slowing economy.

JEL Classification: C61, E31, E37, E52, F41

Suggested Citation

Hamann, Franz and Bejarano, Jesús and Rodríguez, Diego and Restrepo-Echavarria, Paulina, Monetary Policy in an Oil-Exporting Economy (2016). Review, Vol. 98, Issue 3, pp. 239-61, 2016, Available at SSRN: https://ssrn.com/abstract=2839195 or http://dx.doi.org/10.20955/r.2016.239-261

Franz Hamann (Contact Author)

Central Bank of Colombia ( email )

Carrera 7 #14-78
3551 de Bogotá
Colombia

Jesús Bejarano

Central Bank of Columbia

Bogota
Colombia

Diego Rodríguez

Banco de la República, Colombia ( email )

Carrera 7 #14-78
3551 de Bogotá
Colombia

Paulina Restrepo-Echavarria

Federal Reserve Banks - Federal Reserve Bank of St. Louis

P.O. Box 442
St. Louis, MO 63166-0442
United States

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