Oil and the Great Moderation

Anton Nakov and Andrea Pescatori ()

No 735, Working Papers from Banco de España

Abstract: We assess the extent to which the great US macroeconomic stability since the mid-1980s can be accounted for by changes in oil shocks and the oil share in GDP. To do this we estimate a DSGE model with an oil-producing sector before and after 1984 and perform counterfactual simulations. We nest two popular explanations for the Great Moderation: (1) smaller (non-oil) real shocks; and (2) better monetary policy. We find that the reduced oil share accounted for as much as one-third of the inflation moderation, and 13% of the growth moderation, while smaller oil shocks accounted for 11% of the inflation moderation and 7% of the growth moderation. This notwithstanding, better monetary policy explains the bulk of the inflation moderation, while most of the growth moderation is explained by smaller TFP shocks.

Keywords: Great Moderation; oil shocks; Bayesian estimation; counterfactual simulations (search for similar items in EconPapers)
JEL-codes: E32 E52 Q43 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2007-10
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Oil and the Great Moderation (2010)
Working Paper: Oil and the Great Moderation (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0735

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