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

45 Pages Posted: 24 Feb 2012  

Olivier J. Blanchard

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

Marianna Riggi

Bank of Italy

Date Written: November 23, 2011

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, 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 prices, wage rigidities, monetary policy credibility

JEL Classification: E20, E32, 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 in the US (November 23, 2011). Bank of Italy Temi di Discussione (Working Paper) No. 835. Available at SSRN: https://ssrn.com/abstract=2009899 or http://dx.doi.org/10.2139/ssrn.2009899

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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