In a stylized DSGE model with an energy sector, the optimal policy response to an adverse energy supply shock implies a rise in core inflation, a larger rise in headline inflation, and a decline in wage inflation. The optimal policy is well-approximated by policies that stabilize the output gap,...

In a stylized DSGE model with an energy sector, the optimal policy response to an adverse energy supply shock implies a rise in core inflation, a larger rise in headline inflation, and a decline in wage inflation. The optimal policy is well approximated by policies that stabilize the output gap,...

This paper investigates how oil price shocks affect the trade balance and terms of trade in a two country DSGE model. We show that the response of the external sector depends critically on the structure of financial market risk-sharing. Under incomplete markets, higher oil prices reduce the...

In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound for policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States....

We examine the effects of endogenously determined oil price fluctuations in a two-country DSGE model. Under incomplete financial markets, an oil market-specific shock that boosts the oil price results in a wealth transfer toward oil exporters, depresses the oil importer's consumption, and causes...

The paper provides the first quantitative analysis of how U.S. monetary policy responses should differ depending on the source of the observed oil price fluctuations. It presents three main sets of results. First, the paper proposes a novel decomposition of the marginal cost of production that...

The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency,...

Beginning in 2008, in many advanced economies, policy rates reached their zero lower bound (ZLB) and almost at the same time, oil prices started rising again. We analyze how the ZLB affects the propagation of oil shocks. As these shocks move inflation and output in opposite directions, their...

Beginning in 2009, in many advanced economies, policy rates reached their zero lower bound (ZLB). Almost at the same time, oil prices started rising again. We analyze how the ZLB affects the propagation of oil shocks. As these shocks move inflation and output in opposite directions, their...

Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative...