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Oil and the Great Moderation

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  • Anton Nakov
  • Andrea Pescatori

Abstract

We assess the extent to which the greater US macroeconomic stability since the mid-1980s can be accounted for by changes in oil shocks and the oil elasticity of gross output. We estimate a DSGE model and perform counterfactual simulations. We nest two popular explanations for the Great Moderation: smaller (non-oil\link real shocks and better monetary policy. We find that oil played an important role in the stabilisation. Around half of the reduced volatility of inflation is explained by better monetary policy alone, and 57% of the reduced volatility of GDP growth is attributed to smaller TFP shocks. Oil related effects explain around a third. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Suggested Citation

  • Anton Nakov & Andrea Pescatori, 2010. "Oil and the Great Moderation," Economic Journal, Royal Economic Society, vol. 120(543), pages 131-156, March.
    • Handle: RePEc:ecj:econjl:v:120:y:2010:i:543:p:131-156
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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