Commodity price volatility with endogenous natural resources

We also consider how exploration and depletion affect the ranking of optimal monetary and taxation policies. When natural resource reserves are held fixed, monetary policy is an efficient tool for stabilising the effects of commodity price shocks. However, when exploration and depletion are accounted for, using interest rates to stabilise the effects of commodity price changes becomes inefficient. Using taxes on the resource sector, specifically an ad valorem royalty, remains efficient.