Description

This paper analyzes the effects of oil-price shocks from a general equilibrium standpoint. We develop a dynamic stochastic general equilibrium (DSGE) model, estimated by Bayesian methods for the Chilean economy. The model explicitly includes oil in the consumption basket and also in the technology used by domestic firms. With the estim ated model we simulate how monetary policy and other variables would respond to an oil-price s hock under the policy rule that best describes the behavior of the Central Bank of Chile (CBC). We also simulate the counterfactual responses in a flexible prices and wages equilibrium, and under alte rnative monetary frameworks. We show that a 13% increase in the real price of oil leads to a fall in output of about 0.5% and an increase in inflation of about 0.4%. The contractionary effect of the o il shock is mainly due to the endogenous tightening of the monetary policy.