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

Olivier J. Blanchard
Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Jordi Gali
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

August 18, 2007

MIT Department of Economics Working Paper No. 07-21

Abstract:
We characterize the macroeconomics 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.

Keywords: oil, oil price, inflation, credibility, oil share, Great moderation, supply shocks, stagflation, monetary policy, real wage rigidities

JEL Classifications: E20, E32, E52

Working Paper Series

Date posted: August 26, 2007 ; Last revised: April 01, 2008

Suggested Citation

Blanchard, Olivier J. and Gali, Jordi, The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so Different from the 1970s? (August 18, 2007). MIT Department of Economics Working Paper No. 07-21. Available at SSRN: http://ssrn.com/abstract=1008395

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Contact Information

Olivier J. Blanchard (Contact Author) Massachusetts Institute of Technology (MIT) - Department of Economics ( email ) Room E52-357 50 Memorial Drive Cambridge, MA 02142 United States 617-253-8891 (Phone) 617-253-4096 (Fax) HOME PAGE: http://mit.edu/blanchar/www/
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
Jordi Gali Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email ) Ramon Trias Fargas, 25-27 08005 Barcelona Spain +34 93 542 2754 (Phone) +34 93 542 1746 (Fax) HOME PAGE: http://www.econ.upf.es/~gali
Massachusetts Institute of Technology (MIT) - Department of Economics ( email ) 50 Memorial Drive Cambridge, MA 02142 United States
Centre for Economic Policy Research (CEPR) 90-98 Goswell Road London EC1V 7RR United Kingdom
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States