Why are the 2000s so different from the 1970s? A structural interpretation of changes in the macroeconomic effects of oil prices

Olivier Blanchard () and Marianna Riggi

No 15467, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, and at least until the end of 2007, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach Blanchard and Gali (2007a) argued that this has reflected in large part a change in the causal relation from the price of oil to output and inflation. In order to shed light on the possible factors behind the decrease in the macroeconomic effects of oil price shocks, we develop a new-Keynesian model, with imported oil used both in production and consumption, and we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of the two samples (pre and post 1984), the distance between the empirical SVAR-based impulse response functions and those implied by the model. Our results point to two relevant changes in the structure of the economy, which have modified the transmission mechanism of the oil shock: vanishing wage indexation and an improvement in the credibility of monetary policy. The relative importance of these two structural changes depends however on how we formalize the process of expectations formation by economic agents.

JEL-codes: E3 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba, nep-ene and nep-mac
Date: 2009-10
Note: EFG IFM
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