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Fiscal and Monetary Policy Responses to Oil Price Shocks in Oil Importing Low Income Countries

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  • Michael Plante

    (Federal Reserve Bank of Dallas)

Abstract

This paper considers monetary and fiscal policy responses to oil price shocks in low income oil importing countries. I examine the dynamic properties and the welfare implications of a set of inflation targeting policies and a group of policies where the government provides a subsidy on household purchases of oil products and finances this subsidy through some combination of printing money and raising non-distortionary lump sum taxes. Even in the case where lump sum taxes finance the subsidy, it distorts household behavior in important ways leading to over consumption of oil products, increased trade deficits, and distortions to the labor supply. Resorting to the inflation tax to finance the subsidy leads to significant macroeconomic issues when exchange rates are flexible. The welfare gains from a policy that finances the subsidy through lump sum taxation are small compared to the policy with full pass through. For most calibrations the losses from financing the policy through the inflation tax are substantial. The welfare generated by the inflation targeting policies is close to the baseline policy with full pass through so long as the response to inflation is strong enough.

Suggested Citation

  • Michael Plante, 2009. "Fiscal and Monetary Policy Responses to Oil Price Shocks in Oil Importing Low Income Countries," CAEPR Working Papers 2009-017, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
  • Handle: RePEc:inu:caeprp:2009017
    as

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    File URL: https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2009-017.pdf
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    References listed on IDEAS

    as
    1. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 781-808, May.
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    More about this item

    Keywords

    oil prices; monetary and fiscal policy; durables; low income countries;
    All these keywords.

    JEL classification:

    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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