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Oil Prices and Spain's Interest Rates: Did the Link Change After EU Accession?
Abstract
This chapter studies the impact of oil shocks on Spain's short-term interest rates. In so doing, it investigates whether the connection between these two variables changed after 1986 – a period marked by both Spain's EU accession and the move to interest rates as the monetary policy instrument. For the period after 1986, we find that, in response to oil shocks, real short-term interest rates tended to rise, while nominal interest rates increased only gradually. Oil prices impacted interest rates in periods of high oil prices, such as that around the 1990 spike and in some instances since 1999. The increase in interest rates after an oil price shock contributed to reducing inflation, while also making the economic slowdown more marked. The main results are not robust to starting the estimation in 1970, implying that monetary policy became more restrictive in reaction to oil price changes after EU accession.
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