Euro area and global oil shocks: an empirical model-based analysis

Lorenzo Forni, Andrea Gerali (), Alessandro Notarpietro and Massimiliano Pisani

No 873, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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 (search for similar items in EconPapers)
JEL-codes: C11 C51 E32 F41 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-eec, nep-ene and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_873_12

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