Monetary policy implications for an oil-exporting economy of lower long-run international oil prices

Transcription

1 Monetary policy implications for an oil-exporting economy of lower long-run international oil prices Jesús Bejarano Franz Hamann Diego Rodríguez Banco de la República BIS CCA Research Network, Mexico 2015 Banco de la República Oil and Macro BIS CCA Conference 1 / 36

2 Outline The policy question and the problem Small scale Bewley Models Single-good Economy Two-good Economy Oil Exporting Economy Monetary policy models Simple New Keynesian Sectoral Financial Accelerator Sectoral financial accelerator model Final Remarks Banco de la República Oil and Macro BIS CCA Conference 2 / 36

3 Motivation Banco de la República Oil and Macro BIS CCA Conference 3 / 36

4 The question and the problem I Small, open and commodity exporting economies are subject to large and sudden commodity price swings. Banco de la República Oil and Macro BIS CCA Conference 4 / 36

5 The question and the problem I Small, open and commodity exporting economies are subject to large and sudden commodity price swings. I How does monetary policy in an oil-exporting economy cope with a sudden and long-lasting reversal of international oil prices? Banco de la República Oil and Macro BIS CCA Conference 4 / 36

6 The question and the problem I Small, open and commodity exporting economies are subject to large and sudden commodity price swings. I How does monetary policy in an oil-exporting economy cope with a sudden and long-lasting reversal of international oil prices? I We conduct a quantitative assessment of the impact of an unexpected permanent change in oil prices in an oil-exporting economy and derive its monetary policy implications. Banco de la República Oil and Macro BIS CCA Conference 4 / 36

7 The question and the problem I Small, open and commodity exporting economies are subject to large and sudden commodity price swings. I How does monetary policy in an oil-exporting economy cope with a sudden and long-lasting reversal of international oil prices? I We conduct a quantitative assessment of the impact of an unexpected permanent change in oil prices in an oil-exporting economy and derive its monetary policy implications. I Our approach: first, understand the consequences on the economy s NFA, usually assumed exogenous by many models which rely on approximation solution methods. Then, couple it with monetary policy models. Banco de la República Oil and Macro BIS CCA Conference 4 / 36

8 Bewley Endowment Outline The policy question and the problem Small scale Bewley Models Single-good Economy Two-good Economy Oil Exporting Economy Monetary policy models Simple New Keynesian Sectoral Financial Accelerator Sectoral financial accelerator model Final Remarks Banco de la República Oil and Macro BIS CCA Conference 5 / 36

9 Bewley Endowment The problem Asmallopeneconomyrepresentativeagentchoosesconsumptionto maximize: # b t c1 t s t=0 1 s E 0 " Â subject to c t = y t b t+1 + Rb t. I y t is stochastic with E [y]=ȳ and V [y]=h. Banco de la República Oil and Macro BIS CCA Conference 6 / 36

10 Bewley Endowment The problem Asmallopeneconomyrepresentativeagentchoosesconsumptionto maximize: # subject to b t c1 t s t=0 1 s E 0 " Â c t = y t b t+1 + Rb t. I y t is stochastic with E [y]=ȳ and V [y]=h. I b t+1 2 [ f,0] with R given: incomplete financial markets and net debtor economy. Banco de la República Oil and Macro BIS CCA Conference 6 / 36

11 Bewley Endowment The problem Asmallopeneconomyrepresentativeagentchoosesconsumptionto maximize: # subject to b t c1 t s t=0 1 s E 0 " Â c t = y t b t+1 + Rb t. I y t is stochastic with E [y]=ȳ and V [y]=h. I b t+1 2 [ f,0] with R given: incomplete financial markets and net debtor economy. I If br < 1then,b has a LR distribution (PS/BAH model). Banco de la República Oil and Macro BIS CCA Conference 6 / 36

12 Bewley Endowment Aglobalsolution:discretedynamicprogram Let e =(y,b), discretizeitandfindoptimalruleb t+1 = b (e) such that (y b 0 + Rb) 1 s v(e)= max + bp b (e) v(e). (1) b(e)2[ f,0] 1 s where P b (e) is the OTPM and depends on b, R, s, f, E [y] and V [y]. Experiment: expected income E [y] falls unexpectedly and permanently from ȳ to y, keepingv [y] constant. Banco de la República Oil and Macro BIS CCA Conference 7 / 36

13 Bewley Endowment Transitional dynamics I Under high oil prices ē = ȳ, b there is a P with ergodic distribution f.oilpricesfallunexpectedly,implyingafallinexpectedincometoy. Banco de la República Oil and Macro BIS CCA Conference 8 / 36

14 Bewley Endowment Transitional dynamics I Under high oil prices ē = ȳ, b there is a P with ergodic distribution f.oilpricesfallunexpectedly,implyingafallinexpectedincometoy. I Agents reoptimize and solve problem (1), find a new set of optimal rules, P, ergodicdistribution,f,andlongrunvalueofexpecteddebt, E [b]=f b = b. Thus,theeconomyfallsfromē = ȳ, b,previously, to wake up at e = y, b and eventually settle at e = y,b. Banco de la República Oil and Macro BIS CCA Conference 8 / 36

15 Bewley Endowment Transitional dynamics I Under high oil prices ē = ȳ, b there is a P with ergodic distribution f.oilpricesfallunexpectedly,implyingafallinexpectedincometoy. I Agents reoptimize and solve problem (1), find a new set of optimal rules, P, ergodicdistribution,f,andlongrunvalueofexpecteddebt, E [b]=f b = b. Thus,theeconomyfallsfromē = ȳ, b,previously, to wake up at e = y, b and eventually settle at e = y,b. I The evolution of the economy can be characterized by a sequence of probability functions, {f t } t=0 which can be computed iteratively f fp and starting from f 0. Since P is a well behaved Markov chain, the sequence of distributions eventually converges to f. Banco de la República Oil and Macro BIS CCA Conference 8 / 36

16 Bewley Endowment Transitional dynamics I Under high oil prices ē = ȳ, b there is a P with ergodic distribution f.oilpricesfallunexpectedly,implyingafallinexpectedincometoy. I Agents reoptimize and solve problem (1), find a new set of optimal rules, P, ergodicdistribution,f,andlongrunvalueofexpecteddebt, E [b]=f b = b. Thus,theeconomyfallsfromē = ȳ, b,previously, to wake up at e = y, b and eventually settle at e = y,b. I The evolution of the economy can be characterized by a sequence of probability functions, {f t } t=0 which can be computed iteratively f fp and starting from f 0. Since P is a well behaved Markov chain, the sequence of distributions eventually converges to f. I We use this sequence of distributions to compute the expected path of debt, {E t [b]=f t b} t=0. Banco de la República Oil and Macro BIS CCA Conference 8 / 36

17 Bewley Endowment Calibration I We set E [y]=1andv [y]= to match annual (HP-filtered) Colombian annual GDP moments. Fix R = and take s = 4from estimated models at CB. And set b = 0.96 and f = 0.4 tomatch30% external debt to GDP ratio and a fraction of international financial exclusion of 16%. Banco de la República Oil and Macro BIS CCA Conference 9 / 36

18 Bewley Endowment Calibration I We set E [y]=1andv [y]= to match annual (HP-filtered) Colombian annual GDP moments. Fix R = and take s = 4from estimated models at CB. And set b = 0.96 and f = 0.4 tomatch30% external debt to GDP ratio and a fraction of international financial exclusion of 16%. I Considering an autonomous level of absorption, which is present in the data but not in the model economy, the model delivers a 31% debt to GDP and a ratio of financial exclusion of 12%. Banco de la República Oil and Macro BIS CCA Conference 9 / 36

19 Bewley Endowment Calibration I We set E [y]=1andv [y]= to match annual (HP-filtered) Colombian annual GDP moments. Fix R = and take s = 4from estimated models at CB. And set b = 0.96 and f = 0.4 tomatch30% external debt to GDP ratio and a fraction of international financial exclusion of 16%. I Considering an autonomous level of absorption, which is present in the data but not in the model economy, the model delivers a 31% debt to GDP and a ratio of financial exclusion of 12%. I Consumption is procyclical and highly autocorrelated, as in the data, but is about one-third smoother. The current account and the trade balance are also highly correlated in the model as in the data, however the model results are at odds with a well-documented fact which is that both are counter-cyclical in emerging economies. Banco de la República Oil and Macro BIS CCA Conference 9 / 36

20 Bewley Endowment Macro response to a permanent fall in income Net Foreign Assets 0.66 Consumption # Current Account # Trade Balance Banco de la República Oil and Macro BIS CCA Conference 10 / 36

21 Bewley T/N economy Outline The policy question and the problem Small scale Bewley Models Single-good Economy Two-good Economy Oil Exporting Economy Monetary policy models Simple New Keynesian Sectoral Financial Accelerator Sectoral financial accelerator model Final Remarks Banco de la República Oil and Macro BIS CCA Conference 11 / 36

22 Bewley T/N economy The model v(y T,b)= b 0 2[ max apple c t = a ct T f,0] c 1 s 1 s + be y T µ +(1 a) c N t apple v( y T 0,b 0 ) (2) µ 1 µ c T t = y T t + p N t y N b t+1 + Rb t + A T ct N = y N + A N pt N = 1 a c T t a c N t 1+µ Banco de la República Oil and Macro BIS CCA Conference 12 / 36

23 Bewley T/N economy Macro response to a permanent fall in income Output Consumption Real Exchange Rate #10Current -4 Account 5 #10-3 Trade Balance Net Foreign Assets Banco de la República Oil and Macro BIS CCA Conference 13 / 36

24 Bewley Oil economy Outline The policy question and the problem Small scale Bewley Models Single-good Economy Two-good Economy Oil Exporting Economy Monetary policy models Simple New Keynesian Sectoral Financial Accelerator Sectoral financial accelerator model Final Remarks Banco de la República Oil and Macro BIS CCA Conference 14 / 36

25 Bewley Oil economy Oil prices and reserves 140% 1926% 120% % Reserves/Produc,on.(years). 80% 1933% 1942% 1932% 1943% 60% 1931% 1934% 1935% 1927% 1945% 1936% 1946% 1937% 1949% 1947% 1938% 1948% 1950% 1930% 40% 1939% 1929% 1928% 1944% 1952% 1940% 1953% 1955% 1954% 1957% 1956% 1958% 1968% 1960% 1959% 1993% 1992% 1985% 1984% 20% 1966% 1994% 1986% 1995% 1988% 1989% 1987% 1969% 1990% 1982% 1980% 1967% 1997% 1996% 1991% 1983% 1981% 1970% 1979% 1972% 1999% 2001% 2000% 1975%1976% 2009% 2006% 1977% 2005% 2010% 2013% 2012% 2008% 2011% 1971% 1973% 1974% 1998% 2002% 2003% 2004% 1978% 2007% 0% 0% 20% 40% 60% 80% % 120% 140% Oil.Price.(Crude.Price.BP,.real.USD). Banco de la República Oil and Macro BIS CCA Conference 15 / 36

26 Bewley Oil economy Oil sector Economy has a stock of oil s 2 [0, s] and every year d units can be discovered randomly. A representative oil firm can extract x 2 [0,s] units of oil at a cost C (s,x) to sell internationally at the relative price p x (in units ot tradable). The stock of oil evolves as s 0 = s x + d, and the firm seeks to: Optimality requires that v(s)= max x2[0,s] {px x C(s,x)+dE d [v (s x + d)]}. p x = C x (s,x)+de d [l (s l (s)=c s (s,x)+de d [l (s x + d)] x + d)]. Banco de la República Oil and Macro BIS CCA Conference 16 / 36

27 Bewley Oil economy Non-oil economy Associated with this program there is an optimal oil extraction policy, x (s), which the rest of the economy takes as given, thus the resource constraint of the economy becomes: and c T t = y T t + p x x (s)+p N t y N b t+1 + Rb t + A T c N t = y N + A N. Thus, with two assets, optimal borrowing is b 0 (s,b), andatanygivenpoint in time, NFA are not only the summary of debt history but also of oil reserves history. Banco de la República Oil and Macro BIS CCA Conference 17 / 36

28 Bewley Oil economy Calibration I Reserves to Production Ratio (Years) , , Year Mean Mean Banco de la República Oil and Macro BIS CCA Conference 18 / 36

29 Bewley Oil economy Calibration of discoveries Barrels (Thous.) x 10 5 Banco de la República Oil and Macro BIS CCA Conference 19 / 36

30 Bewley Oil economy Macro response to a permanent fall of oil prices Optimal Reserves Oil extraction Net Foreign Assets X: 150 Y: #10Trade -3 Balance Consumption Real Exchange Rate Oil profits #10Current -3 Account Price of Nontradables Banco de la República Oil and Macro BIS CCA Conference 20 / 36

31 Bewley Oil economy Main takeaways from small scale models I The financial and real structure of the economy are important when studying the net foreign position of the economy. Banco de la República Oil and Macro BIS CCA Conference 21 / 36

32 Bewley Oil economy Main takeaways from small scale models I The financial and real structure of the economy are important when studying the net foreign position of the economy. I The differences between the one-good and two-good models point that RER appears to be a key variable in the adjustment process. Banco de la República Oil and Macro BIS CCA Conference 21 / 36

33 Bewley Oil economy Main takeaways from small scale models I The financial and real structure of the economy are important when studying the net foreign position of the economy. I The differences between the one-good and two-good models point that RER appears to be a key variable in the adjustment process. I The differences between the two-good model and the three-good model stresses the point that the NFA adjustment may be substantially different in an oil economy. Banco de la República Oil and Macro BIS CCA Conference 21 / 36

34 Bewley Oil economy Main takeaways from small scale models I The financial and real structure of the economy are important when studying the net foreign position of the economy. I The differences between the one-good and two-good models point that RER appears to be a key variable in the adjustment process. I The differences between the two-good model and the three-good model stresses the point that the NFA adjustment may be substantially different in an oil economy. I However, these models leave aside many features of reality that are of interest to policy makers and central banks. Banco de la República Oil and Macro BIS CCA Conference 21 / 36

35 Bewley Oil economy Main takeaways from small scale models I The financial and real structure of the economy are important when studying the net foreign position of the economy. I The differences between the one-good and two-good models point that RER appears to be a key variable in the adjustment process. I The differences between the two-good model and the three-good model stresses the point that the NFA adjustment may be substantially different in an oil economy. I However, these models leave aside many features of reality that are of interest to policy makers and central banks. I We now turn to the reaction of monetary economies to unexpected permanent changes in oil prices, taking as given the NFA adjustment of the oil economy. Banco de la República Oil and Macro BIS CCA Conference 21 / 36

36 Monetary policy New Keynesian Outline The policy question and the problem Small scale Bewley Models Single-good Economy Two-good Economy Oil Exporting Economy Monetary policy models Simple New Keynesian Sectoral Financial Accelerator Sectoral financial accelerator model Final Remarks Banco de la República Oil and Macro BIS CCA Conference 22 / 36

37 Monetary policy New Keynesian Achanneloutsidethepreviousmodels Oil price (Brent, US$ real) EMBI Colombia* relative to VIX index* *January 2000 = Banco de la República Oil and Macro BIS CCA Conference 23 / 36

38 Monetary policy New Keynesian Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector Banco de la República Oil and Macro BIS CCA Conference 24 / 36

39 Monetary policy New Keynesian Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. Banco de la República Oil and Macro BIS CCA Conference 24 / 36

40 Monetary policy New Keynesian Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. I TisanendowmentandNTuseslaborandimportedinputs(gasoline) to produce. Banco de la República Oil and Macro BIS CCA Conference 24 / 36

41 Monetary policy New Keynesian Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. I TisanendowmentandNTuseslaborandimportedinputs(gasoline) to produce. I Sticky nominal prices in NT sector, flexible prices in T sector. Banco de la República Oil and Macro BIS CCA Conference 24 / 36

42 Monetary policy New Keynesian Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. I TisanendowmentandNTuseslaborandimportedinputs(gasoline) to produce. I Sticky nominal prices in NT sector, flexible prices in T sector. I Central bank targets total inflation Banco de la República Oil and Macro BIS CCA Conference 24 / 36

43 Monetary policy New Keynesian Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. I TisanendowmentandNTuseslaborandimportedinputs(gasoline) to produce. I Sticky nominal prices in NT sector, flexible prices in T sector. I Central bank targets total inflation I Key: country risk premium depends on both b and p x s. Micro-founded version of this: Hamann and Restrepo (2015). Banco de la República Oil and Macro BIS CCA Conference 24 / 36

44 Monetary policy New Keynesian Macro response to a permanent fall of oil prices Extraction 10 Reserves (years) 120 Reserves Flexible Sticky GDP Consumption External debt P T / P N Employment Non tradable output External interest rate Policy rate Total inflation Banco de la República Oil and Macro BIS CCA Conference 25 / 36

45 Monetary policy T/N Financial accelerator Outline The policy question and the problem Small scale Bewley Models Single-good Economy Two-good Economy Oil Exporting Economy Monetary policy models Simple New Keynesian Sectoral Financial Accelerator Sectoral financial accelerator model Final Remarks Banco de la República Oil and Macro BIS CCA Conference 26 / 36

46 Monetary policy T/N Financial accelerator Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector Banco de la República Oil and Macro BIS CCA Conference 27 / 36

47 Monetary policy T/N Financial accelerator Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. Banco de la República Oil and Macro BIS CCA Conference 27 / 36

48 Monetary policy T/N Financial accelerator Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. I Sticky nominal prices in NT sector, flexible prices in T sector. Banco de la República Oil and Macro BIS CCA Conference 27 / 36

49 Monetary policy T/N Financial accelerator Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. I Sticky nominal prices in NT sector, flexible prices in T sector. I Capital is specific to both T and NT sectors, labor can move freely between sectors. Banco de la República Oil and Macro BIS CCA Conference 27 / 36

50 Monetary policy T/N Financial accelerator Key elements of the model I Small open economy DSGE with three sectors: tradable, non-tradable and oil exporting sector I The economy has a stock of oil reserves and extraction is endogenous. I Sticky nominal prices in NT sector, flexible prices in T sector. I Capital is specific to both T and NT sectors, labor can move freely between sectors. I Key: financial accelerator (BGG) in both sectors where net worth is influenced by valuation effects. Banco de la República Oil and Macro BIS CCA Conference 27 / 36

51 Monetary policy T/N Financial accelerator Key 1: Financial accelerator tradable and nontradable (j = N,T ) I Perfectly competitive banks make commercial loans to entrepreneurs, b j t, by taking deposits from households, d t,andborrowingfrom international financial markets, b? t. Banco de la República Oil and Macro BIS CCA Conference 28 / 36

52 Monetary policy T/N Financial accelerator Key 1: Financial accelerator tradable and nontradable (j = N,T ) I Perfectly competitive banks make commercial loans to entrepreneurs, b j t, by taking deposits from households, d t,andborrowingfrom international financial markets, b? t. I Financial intermediation subject to frictions (CSV problem) on the side of the asset side of the banks. Thus, spreads depend on firms net worth, n j t and the value of capital, p kj t k j t. h i E t rt+1 kj = n j t p kj t k j t! n j t (1 + r t )(rp t ) Banco de la República Oil and Macro BIS CCA Conference 28 / 36

53 Monetary policy T/N Financial accelerator Key 1: Financial accelerator tradable and nontradable (j = N,T ) I Perfectly competitive banks make commercial loans to entrepreneurs, b j t, by taking deposits from households, d t,andborrowingfrom international financial markets, b? t. I Financial intermediation subject to frictions (CSV problem) on the side of the asset side of the banks. Thus, spreads depend on firms net worth, n j t and the value of capital, p kj t k j t. h i E t rt+1 kj = n j t p kj t k j t! n j t (1 + r t )(rp t ) I We define a regulation premium, rp t,asany policy that increases credit costs. Banco de la República Oil and Macro BIS CCA Conference 28 / 36

54 Monetary policy T/N Financial accelerator Key 2: Conventional and unconventional tools I Monetary policy rule: reacts to deviations of total inflation relative to the target p i t = i r i pt jp t 1 i exp e µ t p Banco de la República Oil and Macro BIS CCA Conference 29 / 36

55 Monetary policy T/N Financial accelerator Key 2: Conventional and unconventional tools I Monetary policy rule: reacts to deviations of total inflation relative to the target p i t = i r i pt jp t 1 i exp e µ t p Banco de la República Oil and Macro BIS CCA Conference 29 / 36

56 Monetary policy T/N Financial accelerator Key 2: Conventional and unconventional tools I Monetary policy rule: reacts to deviations of total inflation relative to the target p i t = i r i pt jp t 1 i exp e µ t p I Regulation premium rule: reacts to credit deviations from its long-run value crt rp t = exp µ rp 1 cr Banco de la República Oil and Macro BIS CCA Conference 29 / 36

57 Monetary policy Outline The policy question and the problem Small scale Bewley Models Single-good Economy Two-good Economy Oil Exporting Economy Monetary policy models Simple New Keynesian Sectoral Financial Accelerator Sectoral financial accelerator model Final Remarks Banco de la República Oil and Macro BIS CCA Conference 30 / 36

58 Monetary policy Macro response to a permanent fall of oil prices I Extraction 8 Reserves (years) 120 Reserves GDP Consumption 102 External Debt p T / P N Tradable output 96 Non Tradable Output External Interest Rate 7.5 Policy Rate 10 Total Inflation Financial Frictions W/o Financial Frictions Banco de la República Oil and Macro BIS CCA Conference 31 / 36

59 Monetary policy Macro response to a permanent fall of oil prices II 102 Total Credit 110 Tradable Credit 102 Non Tradable Credit Total Investmet Tradable Investment 96 Non Tradable Investment Tradable Capital Tradable Leverage Non Tradable Leverage Non Tradable Capital Tradable Spread 10.5 Non Tradable Spread Financial Frictions W/o Financial Frictions Banco de la República Oil and Macro BIS CCA Conference 32 / 36

60 Monetary policy What if the central bank targets NT inflation? Extraction 8 Reserves (years) 120 Reserves GDP Consumption 105 External Debt p T / P N Tradable output 95 Non Tradable Output External Interest Rate 8 Policy Rate 15 Headline Inflation Headline Inflation Targeting Non-Tradable Inflation Targeting Banco de la República Oil and Macro BIS CCA Conference 33 / 36

61 Monetary policy What if the central bank targets NT inflation? 102 Total Credit 106 Tradable Credit 102 Non Tradable Credit Total Investmet 130 Tradable Investment 96 Non Tradable Investment Tradable Capital Tradable Leverage Non Tradable Leverage Non Tradable Capital Tradable Spread 10.5 Non Tradable Spread Headline Inflation Targeting Non-Tradable Inflation Targeting Banco de la República Oil and Macro BIS CCA Conference 34 / 36

62 Final Remarks Final Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent changes in oil prices Banco de la República Oil and Macro BIS CCA Conference 35 / 36

63 Final Remarks Final Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent changes in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk Banco de la República Oil and Macro BIS CCA Conference 35 / 36

64 Final Remarks Final Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent changes in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I The shock induces additional financial needs for the economy where oil acts as a collateral Banco de la República Oil and Macro BIS CCA Conference 35 / 36

65 Final Remarks Final Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent changes in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I The shock induces additional financial needs for the economy where oil acts as a collateral I It also implies a monetary policy dilemma: inflation jumps (ER pass-through) while activity tanks Banco de la República Oil and Macro BIS CCA Conference 35 / 36

66 Final Remarks Final Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent changes in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I The shock induces additional financial needs for the economy where oil acts as a collateral I It also implies a monetary policy dilemma: inflation jumps (ER pass-through) while activity tanks I This happens even under more realistic conditions, like financial accelerator (BGG) in both sectors where net worth is influenced by valuation effects Banco de la República Oil and Macro BIS CCA Conference 35 / 36

67 Final Remarks Final Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent changes in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I The shock induces additional financial needs for the economy where oil acts as a collateral I It also implies a monetary policy dilemma: inflation jumps (ER pass-through) while activity tanks I This happens even under more realistic conditions, like financial accelerator (BGG) in both sectors where net worth is influenced by valuation effects I To do: fiscal implications. May be relevant if one drops Ricardian equivalence Banco de la República Oil and Macro BIS CCA Conference 35 / 36

68 Final Remarks Supplementary figures I Prob b Banco de la República 0 Oil and Macro BIS CCA Conference 36 / 36