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2009, Social Science Research Network
https://doi.org/10.2139/SSRN.2583456…
71 pages
1 file
I am grateful to Alan Blinder, David Romer, Lutz Kilian, conference participants, and an anonymous referee for helpful comments on an earlier draft of this paper, and to Davide Bertoli for supplying the Blanchard-Galí data and code. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Environmental Economics and Investment Assessment, 2006
A sudden increase in the price of oil is unavoidably associated with the word "shock". Considerable research has shown that an increase in the price of oil reduces output and boosts inflation. This is evidently true for the previous oil crises, but when it comes to the recent upturn in the price of oil, inflation remains under control in developed countries and the world surprisingly continues to grow at a highly respectable pace. The same cause no longer leads to the same consequences. Since very few papers have defined what the main characteristics of a true shock are, it has therefore become of key importance to step back and analyse previous oil crises to better understand the current situation and evaluate what is likely to happen in the coming years. The first section of this paper reviews previous oil crises to establish a grid of characteristics and determine whether the recent upturn in oil markets can be viewed as a genuine oil shock. We will observe that 2004 is evidently different from previous oil shocks. In the second section we will try to understand why today the world does not behave as economics tell us. We will evidence the decreased level of dependency of major economies to oil and show using a VAR model that a redistribution of wealth is in fact offsetting the classic shortfalls of past oil shocks.
The Energy Journal, 2004
This paper reports on developments in theoretical and empirical understanding of the macroeconomic consequences of oil price shocks since 1996, when the U.S. Department of Energy sponsored a workshop summarizing the state of understanding of the subject. Four major insights stand out. First, theoretical and empirical analyses point to intra-and intersectoral reallocations in response to shocks, generating asymmetric impacts for oil price increases and decreases. Second, the division of responsibility for post-oil-price shock recessions between monetary policy and oil price shocks, has leaned heavily toward oil price shocks. Third, parametric statistical techniques have identified a stable, nonlinear, relationship between oil price shocks and GDP from the late 1940s through the third quarter of 2001. Fourth, the magnitude of effect of an oil price shock on GDP, derived from impulse response functions of oil price shocks in the GDP equation of a VAR, is between -0.05 and -0.06 as an elasticity, spread over two years. and Mine Yücel for conversations, discussions, and advice over a period of several years. They are blameless for what follows.
2011
A large volume of research has acknowledged the role of oil price shocks to generate a significant stagflationary impact on U.S. and other oil importing nations. Recent research however shows a paradigm shift in this oil price-macroeconomy relationship since the mid 1980s, during which the U.S. economy has been relatively resilient to x LIST OF FIGURES 2.1
notes that the changes in the international monetary system and the oil price shocks of the early 1970s are not 1 unrelated: "If a single event can take credit for the decision to accept floating exchange rates, it must be the sharp increases in the price of oil that followed the outbreak of war between Egypt and Israel in October 1973." 3 increasingly integrated. The simultaneous occurrence of inflation and recession in the mid-1970s surprised 1 macroeconomic policy makers who were conditioned to see those conditions as alternative regimes. The oil supply shocks of 1973-74 and 1979-80 were boldly visible events followed by considerable turmoil in various markets. Both shocks were followed by worldwide recessions, and the earlier shock by a several-year period of inflation as well. The coincident timing of the oil supply shocks and the periods of macroeconomic disturbance was too close for possible causal links to be ignored, and considerable attention was devoted to studying the macroeconomics of these events. Nevertheless, these periods, particularly the earlier one, included other events whose effects became entangled with those of the oil price shocks. Several industrial countries, including the United States, were just dismantling price controls, which may have affected both real economic events and the accuracy of the data recording them. Monetary and fiscal policies in several countries were parts of pre-existing campaigns against inflation, so on that score as well, the oil price shocks were not ripples in a completely calm pool. While some empirical estimates of the effect of the 1973-74 shock indicated an effect on GNP as high as 7%, other researchers had difficulty reconciling such a magnitude of effect with the small relative share of oil, or even all energy, in GNP (1.5% for oil and 3.5% for all energy). Of course, as Cochrane (1994, p. 349) points out, this "small input" problem applies to money as well as oil: the cost of holding reserves plus cash is the interest cost, which amounts to about 1/10% of GDP. Then in 1986, disagreements among OPEC members precipitated a collapse in the price of oil which, notably, did not produce a economic boom. This asymmetry in macroeconomic response to oil price spikes and collapses elicited different responses among researchers regarding the underlying causality of the oil price shocks and the previous recessions.
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.
International Journal of Management, Accounting and Economics , 2022
In a world scale economy considering interlinkage and interactions between countries, economic shocks will affect various economies through channels. Meantime, the oil price is one of the most important channels. New studies show that the connection between the oil price and the world economy has numerous complications which could not be incorporated in traditional frames with only taking into consideration separated and identified oil supply and demand shocks without considering synchronicity and the source of the main shocks. Therefore it is essential to model a multi-dimensional system. The purpose of this study is to investigate the impact of oil price shocks on the major macroeconomic variables of oil-exporting countries from 1974Q1 to 2019Q4 using the global vector autoregressive (GVAR) approach. The macroeconomic variables include four domestic variables, three foreign variables and one global variable. In particular, it provides a theoretical framework for the global oil market to illustrate how multi-country approach to modeling oil markets can be used to identify country-specific oil price shocks. On the empirical side, it shows the global economic implications of oil price shocks vary considerably depending on which country is subject to the shock. The results of this study indicate that the economic consequences of a positive oil price shock are different on macroeconomic variables in oil-exporting countries in short-run and long-run. However, in response to a positive oil price shock, most of OPEC countries experience long-run inflationary pressures.
2008
The effect of oil price shocks on U.S. economic activity seems to have changed since the mid-1990s. A variety of explanations have been offered for the seeming change—including better luck, the reduced energy intensity of the U.S. economy, a more flexible economy, more experience with oil price shocks and better monetary policy. These explanations point to a weakening of the
Energy Economics, 2014
We employ a set of sign restrictions on the impulse responses of a Global VAR model, estimated for 38 countries/regions over the period 1979Q2-2011Q2, as well as bounds on impact price elasticities of oil supply and oil demand to discriminate between supply-driven and demand-driven oil-price shocks, and to study the time pro…le of their macroeconomic e¤ects across a wide range of countries and real/…nancial variables. We show that the above identi…cation scheme can greatly bene…t from the cross-sectional dimension of the GVAR-by providing a large number of additional crosscountry sign restrictions and hence reducing the set of admissible models. The results indicate that the economic consequences of a supply-driven oil-price shock are very di¤erent from those of an oil-demand shock driven by global economic activity, and vary for oilimporting countries compared to energy exporters. While oil importers typically face a long-lived fall in economic activity in response to a supply-driven surge in oil prices, the impact is positive for energy-exporting countries that possess large proven oil/gas reserves. However, in response to an oil-demand disturbance, almost all countries in our sample experience long-run in ‡ationary pressures, an increase in real output, a rise in interest rates, and a fall in equity prices.
Policy Research Working Papers, 2013
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
SSRN Electronic Journal, 2004
Most studies of the macroeconomic impact of higher oil prices do not distinguish two different cases of higher oil prices: the demand-driven versus supply-driven. As result, these studies, particularly those quantitative ones, would either underestimate the acuteness of a true supply-side oil shock or exaggerate the impact of higher oil prices driven mainly by increase global demand. This paper shows that the macroeconomic implications of these two cases are different: one is more an indication that the global economic growth is at or beyond the potential supported by global oil supply, while only the other could be defined as an oil shock.
Review
ETWEEN the end of 1985 and the second quarter of 1986, oil prices fell by about half, the reverse of the near doubling of oil prices in both 1973-74 and in 1979-81.' This decline prompted a renewed debate about the effects of oil price changes-and whether the effects of oil price declines are simply the reverse of oil price increases, that is, whether the effects are symmetric. This article examines these issues. A theoretical analysis of oil and energy price effects on the economy is presented first, along with some evidence on the actual effects of oil price increases on the United States and other countries. While the theory indicates symmetric effects, several arguments suggest the 1986 oil price decline will not have equal and opposite, or symmetric, effects on the economy. THE THEORETICAL CHANNELS OF OIL PRICE EFFECTS There are several channels through which an oil price 'shock," an unanticipated change in the level of
2005
This paper provides new empirical evidence on and theoretical support for the close link between oil prices and aggregate macroeconomic performance in the 1970s. Although this link has been well documented in the empirical literature and is further confirmed in this paper, standard economic models are not able to replicate this link when actual oil prices are used to simulate the models. In particular, standard models cannot explain the depth of the recession in 1974-75 and the strong revival in 1976-78 based on the oil price movements in that period. This paper argues that a missing multiplier-accelerator mechanism from standard models may hold the key. This multiplier-accelerator mechanism not only exacerbated the impact of the oil shocks in 1973-74 but also helped create the temporary recovery in 1976-78. This paper derives the missing multiplier-accelerator mechanism from externalities in general equilibrium. Our calibrated model can explain both the recession in 1974-75 and the revival in 1976-78.
Crude oil remains the primary source of energy, accounting for almost a third of global energy production. The international crude oil prices are highly volatile and varies far more frequently than any other energy commodity, this carries serious risks for the oil exporting economies. Positive oil price shock implies an increase in wealth transfers from oil importing economies to the oil exporting economy. The falling oil prices triggers a trade imbalance, balance of payments as the foreign reserves starts to shrink and it widens the fiscal deficit for energy exporting economies. Most of the oil producing companies are state owned in oil exporting economies. The national government is the main beneficiary from the oil export, its direct revenues, royalty, value added tax and windfall taxes associated with oil production. There are many macroeconomic indicators that are highly affected by the crude price uncertainty. The paper studied the findings from the previous research literatur...
Journal of Money, Credit and Banking, 2007
This paper o¤ers a plausible explanation for the close link between oil prices and aggregate macroeconomic performance in the 1970s. Although this link has been well documented in the empirical literature, standard economic models are not able to replicate this link when actual oil prices are used to simulate the models. In particular, standard models cannot explain the depth of the recession in 1974-75 and the strong revival in 1976-78 based on the oil price movements in that period. This paper argues that a missing multiplier-accelerator mechanism from standard models may hold the key.
Oxford Review of Economic Policy, 2011
SSRN Electronic Journal, 2000
The effect of oil price shocks on U.S. economic activity seems to have changed since the mid-1990s. A variety of explanations have been offered for the seeming change -including better luck, the reduced energy intensity of the U.S. economy, a more flexible economy, more experience with oil price shocks and better monetary policy. These explanations point to a weakening of the relationship between oil prices shocks and economic activity rather than the fundamentally different response that may be evident since the mid-1990s. Using a dynamic stochastic general equilibrium model of world economic activity, we employ Bayesian methods to assess how economic activity responds to oil price shocks arising from supply shocks and demand shocks originating in the United States or elsewhere in the world. We find that both oil supply and oil demand shocks have contributed significantly to oil price fluctuations and that U.S. output fluctuations are derived largely from domestic shocks.
2009
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.
2019
This paper uses a linear projection method proposed by Jorda (2005) to model how the United States business cycle affects the response of output to positive oil price shocks. I use a nonlinear specification for oil price increases, introduced by Lee, Ni, and Ratti (1995), which internalizes a number of popular theories in the macroeconomic literature for the determinants of the magnitude of the oil-output response. I first confirm the results of Lee, Ni, and Ratti (1995), that conditional expected volatility of oil price predictions at the time are important for the output response, with more recent data and an alternate estimation framework. Using a model that allows for coefficient stateswitching between periods of low and high output growth, I show that output may be more vulnerable to unexpected oil price increases in the quarters immediately preceding NBER recession periods, although output still does not appear more vulnerable in the recession itself. I lastly discuss what the...
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