The Effects of Exogenous Oil Supply Shocks on Output and Inflation: Evidence from the G7 Countries

37 Pages Posted: 22 Mar 2006

See all articles by Lutz Kilian

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 2005

Abstract

Using state-of-the-art methods, this study estimates and compares the effects of exogenous shocks to global oil production on seven major industrialized economies. The main findings are: (1) There is a fair degree of similarity in the real growth responses. An exogenous oil supply disruption typically causes a temporary reduction in real GDP growth that is concentrated in the second year after the shock. (2) Inflation responses are more varied. The median CPI inflation response peaks after three to four quarters. There is clear evidence that exogenous oil supply disruptions need not generate sustained consumer price inflation. Evidence of sustained inflation (as in the case of Germany) therefore must reflect a favorable institutional environment. (3) The evidence of stagflationary responses is strongest for Germany, Japan and Canada, whereas for the US, the UK and Italy there is little or no evidence of stagflationary responses to oil supply shocks. (4) As measured by cumulative inflation and real growth responses, some countries such as Italy, France and Japan have fared well when faced with exogenous oil supply disruptions, whereas others such as Germany have not. (5) A counterfactual historical exercise suggests that the evolution of CPI inflation in the G7 countries would have been similar overall to the actual path even in the absence of exogenous shocks to oil production, consistent with a monetary explanation of inflation. There is no evidence that the 1973/74 and 2002/03 oil supply shocks had a substantial impact on real growth in any G7 country, but for some G7 countries the 1978/79, 1980, and 1990/91 shocks had some impact.

Keywords: Counterfactual, inflation, oil supply, real GDP growth and stagflation, exogeneity, dynamic effects

JEL Classification: E31, E32, Q34

Suggested Citation

Kilian, Lutz, The Effects of Exogenous Oil Supply Shocks on Output and Inflation: Evidence from the G7 Countries (December 2005). CEPR Discussion Paper No. 5404. Available at SSRN: https://ssrn.com/abstract=892873

Lutz Kilian (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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