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How Strongly Did the 2007/08 Oil Price Hike Contribute to the Subsequent Recession?

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  • Kai Carstensen
  • Steffen Elstner
  • Georg Paula

Abstract

What were the economic consequences of the 2007/08 oil price hike for Germany? In this paper we use a structural vector autoregressive model to study the effects of oil price changes driven by different supply and demand shocks on the German economy. We find that a higher oil bill always stifles private consumption expenditures but the response of GDP crucially depends on the underlying shock. On the one hand, an oil supply disruption clearly provokes a recession. On the other hand, positive demand shocks prompt a temporary increase in exports and investment that initially outweigh the cutback on consumption induced by soaring oil prices and thus boost GDP for a while. A disaggregate analysis of the manufacturing sector suggests that a demand-driven oil price rise leads to a shift in world demand towards German export goods. In a counterfactual analysis we show that the world demand shocks that led to the 2007/08 oil price hike triggered a delayed 0.8 percent reduction of German GDP in 2009 and, therefore, notably contributed to the recession of that year.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3357.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3357

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Keywords: German production; oil market; demand shocks; supply shocks; vector autoregressions;

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