Oil Price Shocks and Exchange Rate Management: The Implications of Consumer Durables for the Small Open Economy

45 Pages Posted: 11 Apr 2008 Last revised: 22 Sep 2022

See all articles by Michael Plante

Michael Plante

Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

Date Written: April 10, 2008

Abstract

This paper examines exchange rate management issues when a small open economy is hit by an exogenous oil price shock. In this model consumer durables play an important role in the demand for oil and oil based products as opposed to the traditional role of oil as a factor of production. When prices are sticky, oil price shocks lead to reduced output, lower inflation, and real exchange rate deprecation. The output losses occur whether or not oil is in the production function because of the close relationship between consumer durables and oil. Tentative results suggest that flexible exchange rates produce smaller output losses and less volatile inflation in the non-tradables sector than fixed exchange rates but at the cost of front-loading real exchange rate movements.

Keywords: oil, durables, exchange rates

JEL Classification: E31, F41, E52

Suggested Citation

Plante, Michael D., Oil Price Shocks and Exchange Rate Management: The Implications of Consumer Durables for the Small Open Economy (April 10, 2008). CAEPR Working Paper No. 2008-007, Available at SSRN: https://ssrn.com/abstract=1118909 or http://dx.doi.org/10.2139/ssrn.1118909

Center for Applied Economics And Policy Research (Contact Author)

Indiana University Bloomington - Department of Economics

Wylie Hall
Bloomington, IN 47405-6620
United States

Michael D. Plante

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )

100 South Woodlawn Avenue, Wylie Hall 250
Bloomington, IN 47405-1704
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
212
Abstract Views
1,618
Rank
259,301
PlumX Metrics