DP6631 The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?

Author(s): Olivier J Blanchard, Jordi Galí
Publication Date: January 2008
Keyword(s): Great Moderation, Monetary policy credibility, Real wage rigidities, Sticky Prices
JEL(s): E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6631

We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labour markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.