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Monetary Policy Trade‐Offs with a Dominant Oil Producer
Author(s) -
NAKOV ANTON,
PESCATORI ANDREA
Publication year - 2010
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00276.x
Subject(s) - economics , markup language , distortion (music) , oil price , production (economics) , inflation (cosmology) , monetary economics , monetary policy , oil production , process (computing) , econometrics , macroeconomics , computer science , petroleum engineering , engineering , amplifier , computer network , physics , bandwidth (computing) , theoretical physics , xml , operating system
We model oil production decisions from optimizing principles rather than assuming exogenous oil price shocks and show that the presence of a dominant oil producer leads to sizable static and dynamic distortions of the production process. Under our calibration, the static distortion costs the U.S. around 1.6% of GDP per year. In addition, the dynamic distortion, reflected in inefficient fluctuations of the oil price markup, generates a trade‐off between stabilizing inflation and aligning output with its efficient level. Our model is a step away from discussing the effects of exogenous oil price variations and toward analyzing the implications of the underlying shocks that cause oil prices to change in the first place.