Economic Variables And Monetary Policy

1478 Words Nov 12th, 2014 6 Pages
As was mentioned above rising in oil prices influence the increase in inflation. And it is big dilemma for monetary policy, because arise a question what should central banks do? Should they tighten monetary policy to correct the effects of oil prices increases and prevent inflation? Or they should take in oil prices increases with easy monetary policy to support growth of output and employment. In this situation, central banks have these two main problems. The point is that central banks can do nothing for preventing of an increasing of world oil prices from harming oil importing countries. The country will less other services or goods when oil import will be paid, or to understand how to leave and consume less oil, go deeper to depth. So, monetary policy can help only what forms of damages takes. The second problem is that central banks have little control of real economic variables, because of neutrality of money. Monetary policy can control only the growth and nominal GDP. If a country has output growth, but at the same time inflation growth as output grow, this situation has nothing beneficial to a county citizens. So, if we put all these together, it becomes understandable that central bank of an importing country have limiting options to deal with oil price shock. They can apply tighten policy to keep inflation from rise, but in this case real GDP will decrease or will be behind the growth of potential GDP. As a result, a country will have negative output gap and…
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