Description

Supply shock effects comming from high import prices, such as the current oil price shock, are analyzed based on a dynamic semi-structural model calibrated for the Guatemalan economy. It is argued that a worldwide oil price increase affects domestic prices through a direct and an indirect channel. The former derives from the direct import of petroleum related products, which become more expensive, while the latter channel derives from the import of commodities whose production costs involve expenditures on any petroleum derivative product. In addition, three different central bank monetary policy responses to the oil shock namely a passive position, an output targeting policy, and inflation targeting are simulated and their results are compared. It is concluded that an inflation targeting regime, which is expected to be fully functioning in Guatemala by 2006 would be a better monetary policy response to contrarrest the negative effects of an oil shock, rather than the output targeting policy that is currently being undertaken.