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Oil price shocks: Demand vs Supply in a two-country model

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  • Alessia Campolmi

    (Central European University, Magyar Nemzeti Bank)

Abstract

From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103%. Such an increase is comparable to the one experienced during the oil shock of 1973. At the same time, the behaviour of real GDP growth, Consumer Price inflation (CPI inflation), GDP Deflator inflation, real wages and wage inflation in the U.S. in the 1970s was very different from the one exhibited in the 2000s. What can explain such a difference? Within a two-country framework where oil is used in production, two kinds of shocks are analyzed: (a) a reduction in oil supply, (b) a persistent increase in foreign productivity (as proxy for the experience of China in the last years). It is shown that, while the 1970s are consistent with a supply shock, the shock to foreign productivity generates dynamics close to the one observed in the 2000s.

Suggested Citation

  • Alessia Campolmi, 2008. "Oil price shocks: Demand vs Supply in a two-country model," MNB Working Papers 2008/5, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2008/5
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    References listed on IDEAS

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    Cited by:

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    2. Anna Lipínska & Stephen Millard, 2012. "Tailwinds and Headwinds: How Does Growth in the BRICs Affect Inflation in the G-7?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 227-266, March.
    3. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2008. "Oil Price Shocks, Macroeconomic Stability and Welfare in a Small Open Economy," Working Papers 0802, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    4. Gulzar Khan & Adiqa Kiani & Ather Maqsood Ahmed, 2017. "Globalization, Endogenous Oil Price Shocks and Chinese Economic Activity," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 22(2), pages 39-64, July-Dec.
    5. Khalil, Makram, 2020. "Global oil prices and the macroeconomy: The role of tradeable manufacturing versus nontradeable services," Discussion Papers 60/2020, Deutsche Bundesbank.
    6. Deren Unalmis & Ibrahim Unalmis & Ms. Filiz D Unsal, 2009. "On the Sources of Oil Price Fluctuations," IMF Working Papers 2009/285, International Monetary Fund.
    7. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2010. "On the Sources of Oil Price Fluctuations (Petrol Fiyatlarindaki Dalgalanmalarin Kaynaklari)," Working Papers 1005, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    8. Nyakundi M. Michieka & Richard S. Gearhart, 2022. "Oil price changes and wages: a nonlinear and asymmetric approach," Economic Change and Restructuring, Springer, vol. 55(1), pages 1-71, February.

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    More about this item

    Keywords

    oil price; open economy; demand and supply shocks.;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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