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Accounting for the declining economic effects of oil price shocks

Yifei Lyu

Energy Economics, 2021, vol. 96, issue C

Abstract: Many studies have concluded that the effects of oil price shocks have diminished since the mid-1980s. This paper revisits the evidence in Blanchard and Galí (2010)​. I show that the apparent instability in the oil price-macroeconomy relationship they find can be accounted for by the endogeneity of oil price changes and the lower energy share in consumption in recent decades. When these two factors are taken into account, the effects of oil price shocks on real economic activity appear to be stable over time. Nevertheless, the impact of oil prices on inflation has noticeably weakened.

Keywords: VAR; Oil price; Instability; Energy share; Oil demand; Impulse response (search for similar items in EconPapers)
JEL-codes: C32 C51 E32 Q43 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.eneco.2020.105015

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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