Monetary Policy Rules and Oil Price Shocks
Kiel Working Paper No. 1090
40 Pages Posted: 6 Jul 2005
Date Written: January 2002
Abstract
This paper studies the relative performance of alternative monetary policy rules in the presence of oil price shocks in a small open economy optimizing model. Our analysis shows that it is important to distinguish between alternative price indices (CPI, core CPI, and GDP deflator) when modeling the effects of oil price increases. This distinction has important implications for monetary policy as the central bank has to decide which inflation rate to target. Our results demonstrate that targeting the change in the GDP deflator is an inferior monetary policy strategy in the presence of oil price shocks.
Keywords: Monetary policy rules, open economy, oil price shocks, price indices
JEL Classification: E31, E32, E52, E58, F41
Suggested Citation: Suggested Citation
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