WHY ARE THE 2000s SO DIFFERENT FROM THE 1970s? A STRUCTURAL INTERPRETATION OF CHANGES IN THE MACROECONOMIC EFFECTS OF OIL PRICES
Olivier Blanchard,Marianna Riggi +1 more
TLDR
The authors used a minimum distance estimator that minimizes, over the set of structural parameters and for each of two samples (pre- and post-1984), the distance between the empirical SVAR-based impulse response functions and those implied by a new-Keynesian model.Abstract:
In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach, Blanchard and Gali (in J. Gali and M. Gertler (eds.) 2009, International Dimensions of Monetary Policy, University of Chicago Press, pp. 373–428) argued that this reflected a change in the causal relation from the price of oil to output and inflation. They then argued that this change could be due to a combination of three factors: a smaller share of oil in production and consumption, lower real wage rigidity, and better monetary policy. Their argument, based on simulations of a simple new-Keynesian model, was informal. Our purpose in this paper is to take the next step, and to estimate the explanatory power and contribution of each of these factors. To do so, we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of two samples (pre- and post-1984), the distance between the empirical SVAR-based impulse response functions and those implied by a new-Keynesian model. Our empirical results point to an important role for all three factors.read more
Figures
Figure 5b. Estimated and Implied IRFs. Level/growth VAR. Model specification (ii) 
Figure 2. Domestic Inflation Expectations response to an oil price shock 
Figure 3a. Estimated and Implied IRFs. Specification (i) 
Table 6 Estimated Parameters under Leontief technology. Specification (ii) 
Figure 5b. Estimated and Implied IRFs. Level/growth VAR. Model specification (ii) 
Figure 4. Impulse responses to an oil price shock. Level/Growth specification of the VAR
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