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

76 Pages Posted: 26 Aug 2007 Last revised: 1 Apr 2008

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Jordi Galí

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)

Date Written: August 18, 2007

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 Classification: E20, E32, E52

Suggested Citation

Blanchard, Olivier J. and Galí, 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: https://ssrn.com/abstract=1008395 or http://dx.doi.org/10.2139/ssrn.1008395

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Peter G. Peterson Institute for International Economics ( email )

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Washington, DC 20036
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Jordi Gali

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
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 )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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United States

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