Optimal simple monetary policy response to oil-price shocks in an oil-importing small open economy: The case of the Philippines

Date of Publication

8-2019

Document Type

Master's Thesis

Degree Name

Master of Science in Economics

Subject Categories

Economics

College

School of Economics

Department/Unit

Economics

Thesis Adviser

Dickson A. Lim

Defense Panel Chair

Lawrence B. Dacuycuy

Defense Panel Member

Mariel Monica R. Sauler
Roberto B. Raymundo

Abstract/Summary

Many small economies are reliant on imported oil for economic activities. Hence, these economies are susceptible to the recessive effects of oil price shocks, particularly positive shocks. The analyses on optimal monetary policy in the face of unanticipated changes in real oil prices have so far been limited to models characterizing close economies, large open economies, and small economies exporting oil. A dynamic stochastic general equilibrium (DSGE) model developed by An and Kang (2012) was calibrated to describe the Philippine economy and used to simulate the effects of an unanticipated increase in real oil price to the oil-importing, small open economy. To characterize the optimal monetary rule for the Bangko Sentral ng Pilipinas (BSP), a welfare loss criterion that is based on the disturbance in inflation rate, output growth and exchange rate was used. The results of the study show that a positive oil price shock causes a temporary contraction in the economy that is under a baseline monetary rule that targets headline inflation and output. The optimal monetary response in the context of the model subjected to an oil price shock is an interest rate rule that responds to disturbances in core inflation with a heavy emphasis on interest rate smoothing. The monetary policy conduct of the BSP in event of oil price shocks which was to control for second-round effects of the shock is aligned with the optimal rule found in the study.

Abstract Format

html

Language

English

Format

Electronic

Accession Number

CDTG008209

Keywords

Monetary policy--Philippines; Petroleum products—Prices--Philippines

Upload Full Text

wf_no

Embargo Period

2-26-2025

This document is currently not available here.

Share

COinS