Why are the 2000s so Different from the 1970s? A Structural Interpretation of Changes in the Macroeconomic Effects of Oil Prices

32 Pages Posted: 30 Oct 2009

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

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

Marianna Riggi

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: October 27, 2009

Abstract

In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, and at least until the end of 2007, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach Blanchard and Gali (2007a) argued that this has reflected in large part a change in the causal relation from the price of oil to output and inflation. In order to shed light on the possible factors behind the decrease in the macroeconomic effects of oil price shocks, we develop a new-Keynesian model, with imported oil used both in production and consumption, and we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of the two samples (pre- and post 1984), the distance between the empirical SVAR-based impulse response functions and those implied by the model. Our results point to two relevant changes in the structure of the economy, which have modified the transmission mechanism of the oil shock: vanishing wage indexation and an improvement in the credibility of monetary policy. The relative importance of these two structural changes depends however on how we formalize the process of expectations formation by economic agents.

Keywords: oil, real wage rigidity, new Keynesian, credibility

JEL Classification: E3, E52

Suggested Citation

Blanchard, Olivier J. and Riggi, Marianna, Why are the 2000s so Different from the 1970s? A Structural Interpretation of Changes in the Macroeconomic Effects of Oil Prices (October 27, 2009). MIT Department of Economics Working Paper No. 09-27. Available at SSRN: https://ssrn.com/abstract=1496582 or http://dx.doi.org/10.2139/ssrn.1496582

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Marianna Riggi

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
272
Abstract Views
1,192
rank
96,760
PlumX Metrics