Discussion paper

DP13108 Notes on the Underground: Monetary Policy in Resource-Rich Economies

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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Citation

Ferrero, A and M Seneca (2018), ‘DP13108 Notes on the Underground: Monetary Policy in Resource-Rich Economies‘, CEPR Discussion Paper No. 13108. CEPR Press, Paris & London. https://cepr.org/publications/dp13108