DP13108 Notes on the Underground: Monetary Policy in Resource-Rich Economies
|Author(s):||Andrea Ferrero, Martin Seneca|
|Publication Date:||August 2018|
|Keyword(s):||monetary policy, oil export, small open economy|
|JEL(s):||E52, E58, Q30|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13108|
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.