Citation

Discussion Paper Details

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

Author(s): Andrea Ferrero and Martin Seneca

Publication Date: August 2018

Keyword(s): monetary policy, oil export and small open economy

Programme Area(s): International Macroeconomics and Finance

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.

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Bibliographic Reference

Ferrero, A and Seneca, M. 2018. 'Notes on the Underground: Monetary Policy in Resource-Rich Economies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13108