World Crude Oil Markets: Monetary Policy and the Recent Oil Shock

March 1, 2006

Preview Citation

Format: Chicago

Noureddine Krichene. World Crude Oil Markets: Monetary Policy and the Recent Oil Shock, (USA: International Monetary Fund, 2006) accessed November 5, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the relationship between monetary policy and oil prices within a world oil demand and supply model. Low price and high income elasticities of demand and rigid supply explain high price volatilities and producers' market power. Exchange and interest rates do influence oil market equilibrium. The relationship between oil prices and interest rates is a two-way relationship that depends on the type of oil shock. During a supply shock, rising oil prices caused interest rates to increase; whereas during a demand shock, falling interest rates caused oil prices to rise. Record low interest rates led to high oil price volatility in 2005. Data shows that world economic growth and price stability require stable oil markets and therefore more prudent monetary policies.

Subject: Inflation, Oil, Oil prices, Price elasticity, Supply shocks

Keywords: Crude oil, Oil price, Policy equation, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/062
Stock No:

WPIEA2006062
ISBN:

9781451863222
ISSN:

1018-5941

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