Oil return, fed funds and the dollar from 1987 to 2013 - Preliminary; Please do not quote or cite without the authors' permission

Abstract

After the oil crises in the 70's and at the beginning of the 80's, many authors argued that the FED's reaction to oil prices is not optimal and suggested to drop the energy component from the reaction function. This paper studies the period of 1987-2013 and shows that: (1) the FED responded to oil price inflation, (2) expansionary monetary policy fueled the surge in oil price only when it was accompanied by a depreciation of the US dollar and (3) the drop in the dollar's value increased oil prices only when fed funds rates were decreased.