Oil and the Great Moderation

29 Pages Posted: 30 Oct 2007

See all articles by Anton Nakov

Anton Nakov

European Central Bank (ECB); CEPR

Andrea Pescatori

Federal Reserve Bank of Cleveland

Date Written: November 2007

Abstract

We assess the extent to which the great US macroeconomic stability since the mid-1980s can be accounted for by changes in oil shocks and the oil share in GDP. To do this we estimate a DSGE model with an oil-producing sector before and after 1984 and perform counterfactual simulations. We nest two popular explanations for the Great Moderation: (1) smaller (non-oil) real shocks; and (2) better monetary policy. We find that the reduced oil share accounted for as much as one-third of the inflation moderation, and 13% of the growth moderation, while smaller oil shocks accounted for 11% of the inflation moderation and 7% of the growth moderation. This notwithstanding, better monetary policy explains the bulk of the inflation moderation, while most of the growth moderation is explained by smaller TFP shocks.

Keywords: Great Moderation, oil shocks, Bayesian estimation, counterfactual simulations, monetary policy, oil price, great moderation, bayesian estimation, OPEC

JEL Classification: E32, E52, F0, Q43

Suggested Citation

Nakov, Anton A. and Pescatori, Andrea, Oil and the Great Moderation (November 2007). Banco de España Research Paper No. WP-0735, FRB of Cleveland Working Paper No. 07-17, Available at SSRN: https://ssrn.com/abstract=1025850 or http://dx.doi.org/10.2139/ssrn.1025850

Anton A. Nakov (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

CEPR ( email )

London
United Kingdom

Andrea Pescatori

Federal Reserve Bank of Cleveland ( email )

1455 E 6th ST
Cleveland, OH 44114
United States

HOME PAGE: http://clevelandfed.org/Research/Economists/index.cfm?action=ShowAuthorPubs&author=676&pagetype=6

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