Oil and the Great Moderation

Anton Nakov and Andrea Pescatori ()

No 717, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: We assess the extent to which the period of great U.S. 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: Monetary policy; Petroleum products - Prices; Business cycles (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mac and nep-mon
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Citations: View citations in EconPapers (26)

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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:fip:fedcwp:0717

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DOI: 10.26509/frbc-wp-200717

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