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

Abstract

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