Monetary policy implications for an oil-exporting economy of lower long-run international oil prices

Franz Hamann, Jesus Bejarano and Diego Rodriguez Guzman ()

No 12615, Borradores de Economia from Banco de la Republica

Abstract: The sudden collapse of oil prices poses a challenge to inflation targeting central banks in oil exporting economies. This paper illustrates that challenge and conducts a quantitative assessment of the impact of permanent changes in oil prices in a small and open economy, in which oil represents an important fraction of its exports. We calibrate and estimate a variety of real and monetary dynamic stochastic general equilibrium models using Colombian historical data. We find that, in these artificial economies the macroeconomic effects can be large but vary depending on the structure of the economy. The main channels through which the shock passes to the economy come from the increased country risk premium, the real exchange rate depreciation, the sectoral reallocation of resources from nontradables to tradables and the sluggish adjustment of prices. Contrary to the conventional findings in the literature of the financial accelerator mechanism for single-good closed economies, in multiple-goods small open economies the financial accelerator does not play a significant role in magnifying macroeconomic fluctuations. The sectoral reallocation from nontradable to tradables diminishes the financial amplification mechanism.

Keywords: oil prices; precautionary savings; monetary policy; credit; leverage; financial accelerator; Colombia (search for similar items in EconPapers)
JEL-codes: C61 E31 E37 E52 F41 (search for similar items in EconPapers)
Pages: 74
Date: 2015-03-06
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: Monetary policy implications for an oil-exporting economy of lower long-run international oil prices (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000094:012615

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