ne global event shaped the economic outcomes during 2014 and 2015: the sudden collapse of world oil prices.This event has been a source of instability in global financial markets, especially in emerging economies such as Russia, Brazil, Venezuela, Ecuador, and Colombia.This sudden collapse in oil prices has caught the attention of policymakers and academics as the macroeconomic consequences may be significant.An analysis of the implications of such a collapse for monetary policy in small oil-exporting economies is needed for several reasons.First, the oil price shock is large and to some extent occurred earlier than expected.Oil prices increased steadily after 2009 from $35 (U.S. dollars) per barrel to levels surpassing $100 per barrel.In the last quarter of 2014, oil prices fell by 38 percent and country risk spreads and interest rates in oil-exporting economies jumped.The sudden collapse of oil prices poses a challenge to inflation-targeting central banks in oil-exporting economies.In this article, the authors illustrate this challenge and conduct a quantitative assessment of the impact of changes in oil prices in a small open economy in which oil represents an important fraction of its exports.They build a monetary, three-sector, dynamic stochastic general equilibrium model and estimate it for the Colombian economy.They model the oil sector as an optimal resource extracting problem and show that in oil-exporting economies the macroeconomic effects vary according to the degree of persistence of oil price shocks.The main channels through which these shocks pass to the economy come from the real exchange rate, the country risk premium, and sluggish price adjustments.Inflation-targeting central banks in such economies face a policy dilemma: raise the policy rate to fight increased inflation coming from the exchange rate passthrough or lower it to stimulate a slowing economy.