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Revisiting the macroeconomic effects of oil price changes

Author

Listed:
  • Rafal Raciborski
  • Anastasia Theofilakou
  • Lukas Vogel

Abstract

Oil prices have fallen by around 40 % in euro terms since mid-2014, and are expected to remain relatively low in the medium term. With this situation in mind, this section assesses the effect of changes in oil prices on inflation and economic activity in the euro area. The analysis shows that the impact of low oil prices on GDP growth and inflation is likely to be substantial, with the largest change in both variables (0.6 percentage points and 0.3 percentage points, respectively) predicted to occur in 2015. The effect on employment is estimated to peak at around 1 %. The economic impact of oil prices does not seem to vary significantly depending on whether monetary policy is or is not constrained by the zero lower bound. However, the analysis also confirms that large oil price shocks have a nonlinear effect on output growth, especially in the context of the recent sharp fall in oil prices. The fall in output growth that results from a large rise in oil prices is greater in magnitude than the increase in output growth seen when there is a large fall in oil prices.

Suggested Citation

  • Rafal Raciborski & Anastasia Theofilakou & Lukas Vogel, 2015. "Revisiting the macroeconomic effects of oil price changes," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 14(2), pages 19-27, July.
    • Handle: RePEc:euf:qreuro:0142-02
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    Cited by:

    1. Mr. Mauricio Vargas & Daniela Hess, 2019. "The Caribbean and its Linkages with the World: A GVAR Model Approach," IMF Working Papers 2019/256, International Monetary Fund.

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    Keywords

    oil prices;

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