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: www.cepr.org/pubs/dps/DP6631.asp.asp

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.