Modelling Effects of Oil Price Fluctuations in a Monetary DSGE Model

The significant drop in oil prices after the end of 2014 has caused a positive supply shock for oil importing economies and at the same time it has further fuelled deflationary tendencies that already had been presented in many advanced countries. Because of the combination of these two effects in the environment of low inflation and low interest rates, the evaluation of the overall effect is not trivial. Therefore, it is not surprising that the drop in oil prices has become increasingly discussed also in the area of monetary policy. In this paper, we propose an extension of a standard DSGE model used for monetary policy analyses by the oil sector. Unlike existing extensions, we address issues not yet covered by Czech monetary policy models, such as the incidence of motor fuel excise taxes. Using the extended model, we empirically analyse the effects of the oil price drop on the Czech inflation and on the real economy.