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

34 Pages Posted: 27 Jul 2011

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

Date Written: July 27, 2011

Abstract

In the 1970's, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000's, 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 (2009) argued that this reflected a change in the causal relation from the price of oil to output and inflation. They then argued that this change could be due to a combination of three factors, namely, a smaller share of oil in production and consumption, lower real wage rigidity, and better monetary policy. Their argument, based on simulations of a simple New - Keynesian model, was informal. Our purpose in this paper is to take the next step, and to estimate the explanatory power and contribution of each of these factors. To do so, we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of two samples (pre- and post-1984), the distance between the empirical SVAR - based impulse response functions and those implied by a New - Keynesian model. Our empirical results point to an important role for all three factors.

Keywords: oil, monetary policy credibility, real wage rigidities

JEL Classification: E32, E52

Suggested Citation

Blanchard, Olivier J. and Riggi, Marianna, Why are the 2000's so Different from the 1970's? A Structural Interpretation of Changes in the Macroeconomic Effects of Oil Prices (July 27, 2011). Available at SSRN: https://ssrn.com/abstract=1896104 or http://dx.doi.org/10.2139/ssrn.1896104

Olivier J. Blanchard

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 (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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