Monetary policy can play an important role in managing oil discoveries. Ideally governments will use fiscal policy to smooth consumption of oil income. In practice this often does not happen, as governments delay spending until oil revenues are received. This induces changes in the economy, both...

This paper studies how monetary policy should respond to news about an oil discovery, using a workhorse New Keynesian model. Good news about future production can create a recession today under exchange rate pegs and a simple Taylor rule, as seen in practice. This is explained by forward-looking...