Oil price shocks and the optimality of monetary policy

Kormilitsina, Anna

doi:10.1016/j.red.2010.11.001

Cited by 80 publications

(38 citation statements)

References 34 publications

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“…In particular, in a monthly vector autoregression (VAR) model, the recursive identification that assumes no feedback from domestic macroeconomic shocks to the price of energy with the same month (see, inter alia, Blanchard andGali, 2010, andLeduc andSill, 2004, and the references contained therein) is not supported by the data. Moreover, in contrast to most of the existing literature (see, e.g., Carlstrom and Fuerst, 2006;Kormilitsina, 2011;Natal, 2012) the empirical findings suggest that oil prices should be treated as endogenous variables in dynamic stochastic general equilibrium models.…”

Section: Introductioncontrasting

confidence: 77%

The High-Frequency Response of Energy Prices to Monetary Policy: Understanding the Empirical Evidence

Rosa

2013

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper examines the impact of conventional and unconventional monetary policy on energy prices, using an event study with intraday data. Three measures for monetary policy surprises are used: 1) the surprise change to the current federal funds target rate, 2) the surprise component to the future path of policy, and 3) the unanticipated announcements of future large-scale asset purchases (LSAPs). Estimation results show that monetary policy news has economically important and highly significant effects on the level and volatility of energy futures prices and their trading volumes. I find that, on average, a hypothetical unanticipated 100 basis point hike in the federal funds target rate is associated with roughly a 3 percent decrease in West Texas Intermediate oil prices. I also document that, in a narrow window around the Federal Open Market Committee meeting, the Federal Reserve's LSAP1 and LSAP2 programs have a cumulative financial market impact on crude oil equivalent to an unanticipated cut in the federal funds target rate of 155 basis points. Monetary policy affects oil prices mostly by affecting the value of the U.S. dollar exchange rate. Intraday energy prices also respond to news announcements about the U.S. macroeconomy and inventories. The daily responses are never significant, except in the case of inventory news.

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Section: Introductioncontrasting

confidence: 77%

The High-Frequency Response of Energy Prices to Monetary Policy: Understanding the Empirical Evidence

Rosa

2013

SSRN Journal

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“…3 See, for instance, Bernanke et al (1997); Barsky and Kilian (2001); Bodenstein et al (2008); Nakov and Pescatori (2010); Kormilitsina (2011);Bodenstein et al (2012);and Natal (2012). 4 The importance of time-variation in the variance of key macroeconomic aggregates has most clearly emerged from the analysis of competing explanations for the steep decline in inflation and output volatility since the mid1980s (often referred to as the Great Moderation); see, for instance, Primiceri (2005); Sims and Zha (2006).…”

Section: Introductionmentioning

confidence: 99%

Macroeconomic Implications of Oil Price Fluctuations: A Regime-Switching Framework for the Euro Area

Holm‐Hadulla

Hubrich

2017

FEDS

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We investigate whether the response of the macro-economy to oil price shocks undergoes episodic changes. Employing a regime-switching vector autoregressive model we identify two regimes that are characterized by qualitatively different patterns in economic activity and inflation following oil price shocks in the euro area. In the normal regime, oil price shocks trigger only limited and short-lived adjustments in these variables. In the adverse regime, by contrast, oil price shocks are followed by sizeable and sustained macroeconomic fluctuations, with inflation and economic activity moving in the same direction as the oil price. The responses of inflation expectations and wage growth point to second-round effects as a potential driver of the dynamics characterising the adverse regime. The systematic response of monetary policy works against such second-round effects in the adverse regime but is insufficient to fully offset them. The model also delivers (conditional) probabilities for being (staying) in either regime, which may help interpret oil price fluctuations -and inform deliberations on the adequate policy response -in real-time.JEL Classification: E31, E52, C32

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“…Much of the existing analysis on the conduct of monetary policy in the face of oil price fluctuations relies on the counterfactual premise that the real price of crude oil is exogenous with respect to the U.S. economy (see, for example, Leduc and Sill, 2004;Carlstrom and Fuerst, 2006;Dhawan and Jeske, 2007;Plante, 2009a, b;Winkler, 2009;Montoro, 2010;Kormilitsina, 2011;Natal, 2012). Even those DSGE studies that have endogenized the real price of oil have made strong and unrealistic simplifying assumptions about the determination of the price of oil in global markets (see, for example, Backus and Crucini, 1998), have ignored monetary policy (see, for example, Backus and Crucini, 1998;Balke, Brown, and Yu¨cel, 2010;Bodenstein, Erceg, and Guerrieri, 2011;Nakov and Nun˜o, 2011), or have ignored the open economy aspect of the transmission of oil price shocks (see, for example, Bodenstein, Erceg, and Guerrieri, 2008;Nakov and Pescatori, 2010a, b).…”

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confidence: 99%