The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so Different from the 1970s?
Olivier J. Blanchard
National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics
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
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.
Number of Pages in PDF File: 76
Keywords: oil, oil price, inflation, credibility, oil share, Great moderation, supply shocks, stagflation, monetary policy, real wage rigidities
JEL Classification: E20, E32, E52
Date posted: August 26, 2007 ; Last revised: April 1, 2008