1 Introduction 2

2 Empirical Strategy 7

  2.1 Baseline Specification and Identification Strategy 7

  2.2 World Oil and Gas Discovery Data 9

  2.3 Macroeconomic Variables and Price Indices 13

  2.4 Bilateral Real Exchange Rate 15

3 Empirical results 17

  3.1 Benchmark results 17

  3.2 Robustness check 22

4 Model 25

  4.1 Household 26

  4.2 Production 29

    4.2.1 Nontradable sector 30

    4.2.2 Tradable sector 32

    4.2.3 Oil sector 35

  4.3 Aggregate output and external account 37

  4.4 Monetary Policy and Uncovered Interest Parity 39

  4.5 Exchange Rate Dynamics 41

  4.6 News Shocks and Inflation Dynamics 43

5 Calibration and simulation 46

  5.1 Calibration 46

  5.2 Simulation results 48

    5.2.1 Inflation and Real Exchange Rate 48

    5.2.2 Real activity and trade flows 50

    5.2.3 Exchange-rate regime and inflation 50

    5.2.4 Summary 51

6 Conclusion 52