Monetary effects on nominal oil prices |
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Authors: | Max Gillman Anton Nakov |
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Institution: | 1. Cardiff University Business School, Column Drive, Cardiff CF10 3EU, United Kingdom;2. Banco de España, División de Investigación, Alcalá 48, 28014 Madrid, Spain |
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Abstract: | The paper presents a theory of nominal asset prices for competitively owned oil. Focusing on monetary effects, with flexible oil prices the US dollar oil price should follow the aggregate US price level. But with rigid nominal oil prices, the nominal oil price jumps proportionally to nominal interest rate increases. We find evidence for structural breaks in the nominal oil price that are used to illustrate the theory of oil price jumps. The evidence also indicates strong Granger causality of the oil price by US inflation as is consistent with the theory. |
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