Why are the Effects of Recent Oil Price Shocks so Small?

Torsten Schmidt and Tobias Zimmermann

No 29, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: Recent oil price shocks have relatively small effects on real economic activity and inflation compared to the experiences of the seventies and the early eighties. In this paper we analyse possible reasons for these phenomena using the example of the German economy. At first, by estimating a VAR-model and calculating impulse responses to an oil price shock it is confirmed that the macroeconomic effects have become much smaller. Moreover, our simulations show that oil price hikes are more closely related to global economic activity since the early nineties.Then, to get a deeper understanding of the structural changes which are responsible for these results we utilize a new Keynesian open economy model. It becomes obvious that the small effects of the recent oil price shocks on the German economy can be explained by a combination of a reduced energy cost share and good luck in terms of a strong growing global economy. Hence, if global economic growth decreases, pure oil price shocks may still have substantial effects on the German economy, even if the energy pricevulnerability has been reduced.These results should be valid also for other oil importing countries, at least from a qualitative point of view.

Keywords: Oil prices; new Keynesian open economy model (search for similar items in EconPapers)
JEL-codes: E31 E32 F41 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:29

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