Study Of The Relation Between Oil Price Volatility And Monetary Policy

As a basic energy, oil has great significance on modern industry. Since the two oil crises of the20th century, the domestic and foreign scholars pay more attention to the oil price volatility and its influence. At present, most domestic and foreign studies have focused on the impact of oil price volatility on the economy, and a few study the relation between oil price volatility and monetary policy. This paper discussed the relation between oil price volatility and monetary policy of the oil-importing and oil-consuming countries. First of all, it added interest rate and oil price as explanatory variables in the net export function. Second, it established IS-LM-BP extended model to analyze the impact of rising oil price on monetary policy. Third, it established the IS-LM-BP-O model to analyze the impact of an expansionary monetary policy on oil price. Finally, it used the simultaneous equations model to make an empirical test on the United States, China and Japan, which ensured that the theoretical model is reasonable.After the qualitative analysis and empirical test, there were two conclusions. First, the impact of oil price volatility on monetary policy has the following pathways:oil price volatility affected income on commodity market; income changes affected money demand, and finally affected money supply on money market. Second, the impact of monetary policy on oil price volatility has the following pathways:the changes of monetary policy affected interest rate on money market; interest rate changes affected the exchange rate through the balance of payments and the income on commodity market, then finally affected oil demand and oil price on oil market.This paper believed that the relation between oil price volatility and monetary policy was not obvious, but influenced each other through the pathways as above. In order to quickly deal with the impact of oil price volatility on economy, the government should find out the influence pathways between oil price volatility and monetary policy, which would be helpful for the stable operation of the economy.