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Oil price shocks: Demand vs Supply in a two-country model

Alessia Campolmi

No 2008/5, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103%. Such an increase is comparable to the one experienced during the oil shock of 1973. At the same time, the behaviour of real GDP growth, Consumer Price inflation (CPI inflation), GDP Deflator inflation, real wages and wage inflation in the U.S. in the 1970s was very different from the one exhibited in the 2000s. What can explain such a difference? Within a two-country framework where oil is used in production, two kinds of shocks are analyzed: (a) a reduction in oil supply, (b) a persistent increase in foreign productivity (as proxy for the experience of China in the last years). It is shown that, while the 1970s are consistent with a supply shock, the shock to foreign productivity generates dynamics close to the one observed in the 2000s.

Keywords: oil price; open economy; demand and supply shocks. (search for similar items in EconPapers)
JEL-codes: E12 F41 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
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