Oil Price Shocks and Currency Denomination (A revised version of EWP 2005-01)

The paper analyzes the dynamic effects of anticipated price increases of imported raw materials upon two large open economies. It is assumed that the economies have an asymmetric macroeconomic structure on the supply side and are dependent upon a small third country for oil or raw materials imports. The dynamic behavior of several macroeconomic variables is discussed both under US dollar and Euro-currency denomination. It is shown that with Euro-currency denominated oil the stagnationary effects of oil price increases upon both the domestic and foreign economy are reduced. The paper also discusses several monetary policy responses to oil price shocks. --oil price shocks,international policy coordination,currency denomination

On the (de)stabilizing effects of news shocks

This paper analyzes the impacts of news shocks on macroeconomic volatility. Whereas in any purely forward-looking model, such as the baseline New Keynesian model, anticipation amplifies volatility, we obtain ambiguous results when including a backward-looking component. In addition to these theoretical findings, we use the estimated model of Smets and Wouters (2003) to provide numerical evidence that news shocks increase the volatility of key macroeconomic variables in the euro area when compared to unanticipated shocks. --Anticipated shocks,business cycles,volatility

Rational expectations models with anticipated shocks and optimal policy: a general solution method and a new Keynesian example

The purpose of this paper is to show how to solve linear dynamic rational expectations models with anticipated shocks by using the generalized Schur decomposition method. Furthermore, we determine the optimal unrestricted and restricted policy responses to anticipated shocks. We demonstrate our solution method by means of a micro-founded hybrid New Keynesian model and show that anticipated cost-push shocks entail higher welfare losses than unanticipated shocks of equal size. --Anticipated Shocks,Optimal Monetary Policy,Rational Expectations,Generalized Schur Decomposition,Welfare Effects

On the Non-Optimality of Information: An Analysis of the Welfare Effects of Anticipated Shocks in the New Keynesian Model

This paper compares the welfare effects of anticipated and unanticipated cost-push shocks in the canonical New Keynesian model with optimal monetary policy. We find that, for empirically plausible degrees of nominal rigidity, the anticipation of a future cost-push shock leads to a higher welfare loss than an unanticipated shock. A welfare gain from the anticipation of a future cost shock may only occur if prices are sufficiently flexible. We analytically show that this surprising result holds although unanticipated shocks lead to higher negative impact effects on welfare than anticipated shocks. --Anticipated Shocks,Optimal Monetary Policy,Sticky Prices,Welfare Analysis

Monetary Policy Dynamics in Large Oil-Dependent Economies

The paper analyzes the impacts of anticipated and unanticipated monetary policies on two large open economies that are dependent upon raw materials imports from a small third country. The analysis is based on asymmetric behavior on the supply side of both economies and an endogenous commod- ity pricing equation of Phillips' curve type. It is shown that an increase in the growth rate of domestic money supply is not neutral in the long run but induces contractionary output effects in both economies. The paper also dis- cusses the impacts of monetary policy rules that either reduce the in°ationary or contractionary output effects of commodity price shocks. --Monetary Policy,Oil Price Shocks,International Policy Coordination

Solution of RE Models with Anticipated Shocks and Optimal Policy

The purpose of this paper is to solve linear dynamic rational expectations models with anticipated shocks by using the generalized Schur decomposition method. We also determine the optimal unrestricted and restricted policy responses to temporary as well as permanent shocks which both are anticipated by the public. In particular, our method is useful for the analysis of optimal monetary policy in New Keynesian dynamic general equilibrium models. --Anticipated Shocks,Optimal Monetary Policy,Rational Expectations,Generalized Schur Decomposition

Dynamic Effects of Raw Materials Price Shocks for Large Oil-Dependent Economies

The paper analyzes the dynamic effects of anticipated price increases of imported raw materials upon two large open economies. It is assumed that the economies have an asymmetric macroeconomic structure on the supply side and are dependent upon a small third country for oil or raw materials imports. The dynamic behavior of several macroeconomic variables is discussed under alternative scenarios. We first assume that oil is priced in dollars. Thereafter, we investigate the impacts of oil price shocks on the domestic and the foreign economy if oil imports are denominated in terms of domestic currency (Euro) rather than US dollars. It is shown that with domestic- currency denominated oil the stagflationary effects of oil price increases upon both the domestic and foreign economy are reduced. The paper also discusses several monetary policy responses to oil price shocks. --oil price shocks,international policy coordination,time inconsistency,currency denomination

Anticipated Raw Materials Price Shocks and Monetary Policy Response - A New Keynesian Approach

The paper analyzes the dynamic effects of anticipated raw materials price increases for small open oil-dependent economies and investigates the con- sequences of several monetary policy rules in response to commodity price shocks. Based on a calibrated New Keynesian open economy model the analysis shows that anticipated increases in the price of oil will involve oil- dependent economies both in temporary inflation and deflation as well as in output expansion and contraction. Compared to an interest rate Taylor rule a money growth rule is more appropriate to reduce the volatility of the CPI inflation rate whereas just the opposite holds for stabilizing the output gap. --Oil price shocks,Monetary Policy,Open Economy

Anticipated and unanticipated oil price shocks and optimal monetary policy

This paper studies the welfare effects of severalmonetary policy rules in the presence of anticipated and unanticipated oil price shocks. Our analysis is based on a stylized New Keynesian model of a small open economy. Our main findings are the following: i) Standard interest rate rules amplify the welfare loss compared to neutral monetary policies. ii) The optimal policy under commitment, by contrast, dampens the welfare loss. iii) Optimized simple rules can replicate the outcome under the optimal unrestricted rule if they are history-dependent, contain the exchange rate and, in the anticipated case, forward-looking elements. iv) Anticipated oil shocks lead to a higher welfare loss than unanticipated shocks. --Anticipated Shocks,Oil Price Shocks,Open Economy,Optimal Monetary Policy,Simple Policy Rules

Ambiguities in decision-oriented Life Cycle Inventories The Role of mental models

If the complexity of real, socio-economic systems is acknowledged, life cycle inventory analysis (LCI) in life cycle assessment (LCA) cannot be considered as unambiguous, objective, and as an exclusively data and science based attribution of material and energy flows to a product. The paper thus suggests a set of criteria for LCI derived from different scientific disciplines, practice of product design and modelling characteristics of LCI and LCA. A product system with its respective LCI supporting the process of effective and efficient decision-making should ideally be: a) complete, operational, decomposable, non-redundant, minimal, and comparable; b) efficient, i.e., as simple, manageable, transparent, cheap, quick, but still as ‘adequate' as possible under a functionalistic perspective which takes given economic constraints, material and market characteristics, and the goal and scope of the study into account; c) actor-based when reflecting the decision-makers' action space, risk-level, values, and knowledge (i.e. mental model) in view of the management rules of sustainable development; d) as site- and case-specific as possible, i.e. uses as much site-specific information as possible. This rationale stresses the significance of considering both (i) material and energy flows within the technosphere with regard to the sustainable management rules; (ii) environmental consequences of the environmental interventions on ecosphere. Further, the marginal cost of collecting and computing more and better information about environmental impacts must not exceed the marginal benefits of information for the natural environment. The ratio of environmental benefits to the economic cost of the tool must be efficient compared to other investment options. As a conclusion, in comparative LCAs, the application of equal allocation procedures does not lead to LCA-results on which products made from different materials can be compared in an adequate way. Each product and material must be modelled according to its specific material and market characteristics as well as to its particular management rules for their sustainable use. A generic LCA-methodology including preferences on methodological options is not definabl