A0240
Title: Optimal oil price regulations and monetary policy
Authors: Ying Tung Chan - Beijing Normal University (China) [presenting]
Abstract: In global energy markets, some countries fix their refined oil prices while others do not. Should central banks react to international oil price shocks under these two policies? This question is addressed by constructing a dynamic stochastic general equilibrium model with refineries. Quadratic welfare loss functions are derived to show that, while fixed refined oil prices can diminish the sensitivity of the welfare loss function to output and crude oil price volatility, this does not guarantee higher overall welfare. It is shown that central banks should react to the oil price shocks only if the refined oil price is fixed. Under a fixed refined oil price policy, central banks face a trade-off between stabilizing the general price level and crude oil prices, a scenario different from flexible price models that can stabilize both the general price level and output simultaneously. Moreover, the optimal refined oil price should be set to rise with the volatility of oil price shocks.
