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The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s?

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Olivier J. Blanchard
Jordi Galí

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Abstract

We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.

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Paper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 0711.

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Date of creation: Aug 2007
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Handle: RePEc:mee:wpaper:0711

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. David A. Carter & Daniel A. Rogers & Betty J. Simkins, 2006. "Hedging and Value in the U.S. Airline Industry," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(4), pages 21-33. [Downloadable!] (restricted)
  2. Margaret M. McConnell & Gabriel Perez-Quiros, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December. [Downloadable!] (restricted)
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  3. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April. [Downloadable!] (restricted)
  4. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  5. Finn, Mary G, 2000. "Perfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 400-416, August.
  6. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  7. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October. [Downloadable!] (restricted)
  8. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 540-61, May.
  9. Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Jose De Gregorio. & Oscar Landerretche. & Christopher Neilson., 2007. "Another Pass-Through Bites the Dust? Oil Prices and Inflation," Working Papers Central Bank of Chile 417, Central Bank of Chile. [Downloadable!]
  11. Lutz Kilian, 2008. "A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 78-121, 03. [Downloadable!] (restricted)
  12. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc. [Downloadable!]
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  13. Efrem Castelnuovo & Sergio Nicoletti-Altimari & Diego Rodriguez-Palenzuela, 2003. "Definition of price stability, range and point inflation targets - the anchoring of long-term inflation expectations," Working Paper Series 273, European Central Bank. [Downloadable!]
  14. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings, Federal Reserve Bank of Kansas City, pages 9-56. [Downloadable!]
  15. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October. [Downloadable!] (restricted)
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  16. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80. [Downloadable!]
  17. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2001-1), pages 135-174. [Downloadable!]
  18. Herrera, Ana Mar?a & Pesavento, Elena, 2009. "Oil Price Shocks, Systematic Monetary Policy, And The ?Great Moderation?," Macroeconomic Dynamics, Cambridge University Press, vol. 13(01), pages 107-137, February. [Downloadable!]
  19. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  20. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc. [Downloadable!]
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  21. Edelstein, Paul & Kilian, Lutz, 2007. "Retail Energy Prices and Consumer Expenditures," CEPR Discussion Papers 6255, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Giorgio Canarella & WenShwo Fang & Stephen M. Miller & Stephen K. Pollard, 2008. "Is the Great Moderation Ending? UK and US Evidence," Working papers 2008-24, University of Connecticut, Department of Economics. [Downloadable!]
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  2. Necati Tekatli, 2007. "Understanding Sources of the Change in International Business Cycles," UFAE and IAE Working Papers 731.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
  3. Kilian, Lutz & Vega, Clara, 2008. "Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices," CEPR Discussion Papers 7015, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. James D. Hamilton, 2009. "Causes and Consequences of the Oil Shock of 2007-08," NBER Working Papers 15002, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Korhonen, Iikka & Mehrotra, Aaron, 2009. "Real Exchange Rate, Output and Oil: Case of Four Large Energy Producers," BOFIT Discussion Papers 6/2009, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  6. Claudia S. Gómez-López & Luis A.Puch, 2008. "Macroeconomic Consequences of International Commodity Price Shocks," Working Papers 2008-27, FEDEA. [Downloadable!]
  7. Nathan S. Balke & Stephen P. A. Brown & Mine K. Yücel, 2008. "An international perspective on oil price shocks and U.S. economic activity," Globalization and Monetary Policy Institute Working Paper 20, Federal Reserve Bank of Dallas. [Downloadable!]
  8. Hafedh Bouakez & Nooman Rebei & Désiré Vencatachellum, 2008. "Optimal Pass-Through of Oil Prices in an Economy with Nominal Rigidities," Cahiers de recherche 0831, CIRPEE. [Downloadable!]
  9. Francesco Nucci & Marianna Riggi, . "The Great Moderation and Changes in the Structure of Labor Compensation," Working Papers 124, Sapienza University of Rome, Department of Public Economics. [Downloadable!]
  10. Christian Merkl, 2009. "The Inflation-Output Tradeoff: Which Type of Labor Market Rigidity Is to Be Blamed?," Kiel Working Papers 1495, Kiel Institute for the World Economy. [Downloadable!]
  11. Susanto Basu & John G. Fernald, 2009. "What do we know and not know about potential output?," Working Paper Series 2009-05, Federal Reserve Bank of San Francisco. [Downloadable!]
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