Chapter

The Macroeconomic Effects of Oil Price Shocks: Why Are the 2000s so Different from the 1970s?

Olivier J. Blanchard and Jordi Galí

in International Dimensions of Monetary Policy

Published by University of Chicago Press

Published in print March 2010 | ISBN: 9780226278865
Published online February 2013 | e-ISBN: 9780226278872 | DOI: http://dx.doi.org/10.7208/chicago/9780226278872.003.0008
The Macroeconomic Effects of Oil Price Shocks: Why Are the 2000s so Different from the 1970s?

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This chapter discusses the large output losses and the rises in inflation rates that accompanied the two oil shocks of 1970 in most industrialized countries, and shows the more recent absence of analogous effects, even though the rise in oil prices was of a similar magnitude. Using a Value at Risk (VAR) to identify exogenous oil price shocks, the chapter shows that the latter can only account for a relatively small part of the stagflationary episodes of 1970, suggesting that shocks other than oil but coinciding in time with the latter should also be held responsible for the dismal macroeconomic performance of that period. Three alternative explanations for the dampening effects of oil price shocks, that is, a smaller share of oil in production and consumption, more flexible labor markets, and an enhanced credibility of monetary policy are also given and being discussed in this chapter.

Keywords: inflation rates; oil price shocks; Value at Risk; VAR; macroeconomic performance; labor markets

Chapter.  17744 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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