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Research Colloquium — Wednesday, January 28, 2009"Oil Price Shocks and the Optimality of Monetary Policy"Anna Kormilitsina*Department of Economics Southern Methodist University
Rising oil prices and the tightening of the interest rates observed
before almost all of the post World War II recessions has led some to
argue that the U.S. monetary policy exacerbated the recessions generated
by the oil price shocks. In this paper, I critically reevaluate this
claim. I estimate a dynamic stochastic general equilibrium model of
the U.S. economy with the demand for oil. Within this model, I
contrast Ramsey optimal with the estimated monetary policy. I find
that monetary policy indeed amplified the negative effect of the oil
price shock. The optimal response of monetary policy to the shock would
be to raise inflation and interest rates above what has been seen in the
past. *I am highly indebted to my advisor, Stephanie Schmitt-Grohe. I am thankful to Craig Burnside, Riccardo DiCecio, Barbara Rossi, Juan Rubio-Ramirez, and Martin Uribe for guidance and valuable advice and Denis Nekipelov for helpful discussions. I thank the participants of Duke Macro Reading Group for their comments and suggestions and the Federal Reserve Bank of St. Louis for dissertation support. All errors are mine.
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