MONETARY-POLICY AND OIL PRICE SHOCKS - EMPIRICAL IMPLICATIONS OF ALTERNATIVE RESPONSES

Large swings in the price of oil which have occurred during the past t wo decades have substantially affected US inflation, unemployment and economic growth. In the light of those experiences, a debate has arise n over how monetary policy should respond. This study contributes to t hat debate by evaluating empirically the economy's performance under t hree realistic monetary policy response rules. By doing so, it advance s what has largely been a theoretical discussion. The policy rules stu died - money growth targets, nominal GDP growth targets and interest r ate targets - are evaluated by estimating how closely the resulting ec onomic outcomes approximate an 'optimal' outcome. The optimal outcome arises when the Fed follows a well-defined optimal response rule. Of t he three strategies, a nominal GDP target is found to be most desirabl e, while an interest rate target is least desirable.