Empirical Applications Based on Survey Data
Chapter 4 Monetary policy and oil price expectations
4.1 Introduction Since the beginning of the ﬁrst oil crisis in October 1973, the macroeconomic eﬀects of oil price shocks have been analyzed in detail (Carlstrom and Fuerst 2005, Natal 2009, Montoro 2010). In this regard, a large number of studies report a correlation between increases in oil prices and subsequent economic downturns (Hamilton 1983, Hamilton and Herrera 2004). However, it is not clear whether such an economic downturn is directly triggered by an oil price shock or whether the monetary policy tightening due to the inﬂationary pressure causes a downward movement in real economic activity. The debate on whether central banks should respond to the oil price is remarkable but contentious (Bernanke et al., 1997, Hamilton and Herrera 2004, Blanchard and Gali 2007, Svensson 2006) and there is no study examining whether central banks actually respond to the oil price. This letter tries to close this research gap and addresses the question whether central banks respond to the oil price or oil price expectations. To this end, we estimate monetary policy rules in the spirit of Taylor (1993) assuming that the short-term interest rate reacts to inﬂation and output. We account for the forward-looking behavior of central banks (Clarida et al., 1998, 2000) by using a unique data set of expectational data which also prevents the real-time data problem. 70 Chapter 4. Oil price expectations 4.2 The data set To estimate the central bank’s reaction function, we use the relevant short- term interest rate for conducting...
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