Euro Area and Global Oil Shocks: An Empirical Model-Based Analysis

61 Pages Posted: 2 Oct 2012

See all articles by Lorenzo Forni

Lorenzo Forni

International Monetary Fund (IMF)

Andrea Gerali

Bank of Italy

Alessandro Notarpietro

Bank of Italy

Massimiliano Pisani

Bank of Italy

Date Written: July 26, 2012

Abstract

We assess the impact of oil shocks on euro-area macroeconomic variables by estimating a new-Keynesian small open economy model with Bayesian methods. Oil price is determined according to supply and demand conditions in the world oil market. We find that the impact of an increase in the price of oil depends upon the underlying sources of variation: when the driver of higher oil prices is an increase in the rest of the world's aggregate demand, both euro-area GDP and CPI inflation increase, whereas negative oil supply shocks and positive worldwide oil-specific demand shocks have stagflationary effects on the euro-area economy. Moreover, the increase in oil prices during the 2004-2008 period did not induce stagflationary effects on the euro-area economy because it was associated with positive aggregate demand shocks in the rest of the world. Similarly, a drop in world aggregate demand helps to explain the recent (2008) simultaneous drop in oil prices, euro-area GDP and inflation - particularly its fuel component.

Keywords: oil shocks, DSGE modelling, open-economy macroeconomics, Bayesian inference, euro area

JEL Classification: C11, C51, E32, F41

Suggested Citation

Forni, Lorenzo and Gerali, Andrea and Notarpietro, Alessandro and Pisani, Massimiliano, Euro Area and Global Oil Shocks: An Empirical Model-Based Analysis (July 26, 2012). Bank of Italy Temi di Discussione (Working Paper) No. 873. Available at SSRN: https://ssrn.com/abstract=2154933 or http://dx.doi.org/10.2139/ssrn.2154933

Lorenzo Forni

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Andrea Gerali (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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