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Discussion of Oil Price Shocks, Monetary Policy and Stagflation

  • Economics


Discussion of Oil Price Shocks, Monetary Policy and Stagflation 85Discussion Discussion 1. Andrew Filardo1 Lutz Kilian offers a thought-provoking paper that contributes to our evolving understanding of the role of oil prices and the macroeconomy. What is truly remarkable about this paper is Lutz’s ability to shed new light on this topic. This latest effort complements his impressive research in this area over the past decade, which has explored the monetary policy challenges that central banks face as oil prices swing high and low. In this paper, Lutz provides compelling evidence that global demand developments have been the key factor behind the recent behaviour of oil prices. This conclusion is important for at least three reasons. First, since the 1970s, oil price shocks have generally been considered by economists to be a quintessential example of a macroeconomic supply shock. Lutz essentially tells us that such a view has been too simplistic and possibly misleading in current circumstances. Second, this demand- side interpretation suggests that the nature of the macroeconomic stabilisation policies for addressing movements in oil prices should be different from that of policies implemented when oil price movements represent supply shocks. Third, his conclusions run counter to the way many around the globe in the past few years have characterised the oil price developments buffeting their economies, especially in Asia and the Pacific. In this sense, his results should contribute significantly to the ongoing policy debate. Lutz’s paper also provides important insights into one of the questions that the organisers raised in their original call for papers: does the behaviour of relative price changes associated with commodity prices call for a new framework with which to think about policy trade-offs? In my commentary, I would like to draw some implications of his findings for monetary policy frameworks that emphasise the global perspective, rather than t

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