The role of oil prices in monetary policy rules: evidence from 4 major central banks

Recent movements in oil prices on international markets have generated many comments on the role that oil prices may play for Central Banks of oil-importing countries, oil price shocks being interpreted as supply shocks leading to higher inflation rates and lower economic growth. In this paper, we examine the role played by oil prices in the monetary policy strategy of 4 major Central Banks: the U.S. Federal Reserve, the ECB, the Bank of Canada and the Bank of England. Using an Ordered Probit model, we assess the reaction of each Central Bank to oil price changes and investigate a potential asymmetric response to oil price increases and decreases. Our results suggest that the role of oil price for Central Bankers may be very different depending on the objectives and the strategy of each Central Bank regarding inflation and output stabilization.