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Oil Shocks and Macroeconomic Activity: A Putty-Clay Perspective

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  • David R. Stockman

    ()
    (Department of Economics,University of Delaware)

Abstract

I extend the Atkeson and Kehoe (1999) putty-clay model to include elastic labor supply and more general forms of technology to explore the impact of oil shocks on the macroeconomy. In particular, I am interested in (1) how this extension affects their results with regard to permanent changes in the price of oil, (2) a comparison of the business cycle properties of the putty-putty and putty-clay models, and (3) whether or not this extended putty-clay model is subject to the Rotemberg and Woodford (1996) critique of the standard perfectly competitive real business cycle model with energy. Results are reported for a wide range of parameter values illustrating that (1) contrary to the Atkeson-Kehoe result, the response of output and capital to permanent changes in the price of oil is identical in both the putty-putty and putty-clay models and is sensitive to the elasticity of substitution between capital services and labor, (2) there are stark differences in several business cycle features, namely the volatility of energy use and the correlations of output with consumption, investment and hours, and (3) the Rotemberg-Woodford critique applies to the putty-clay model revealing both amplification and timing problems.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2006/UDWP2006-15.pdf
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Bibliographic Info

Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-15.

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Length: 27 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-15

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Postal: Purnell Hall, Newark, Delaware 19716
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Fax: (302) 831-6968
Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Keywords: energy; putty-clay; dynamic general equilbrium;

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References

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  1. Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc.
  2. Steven J. Davis & John Haltiwanger, 1999. "Sectoral Job Creation and Destruction Responses to Oil Price Changes," NBER Working Papers 7095, National Bureau of Economic Research, Inc.
  3. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  4. Patrick J. Kehoe & Andrew Atkeson, 1999. "Models of Energy Use: Putty-Putty versus Putty-Clay," American Economic Review, American Economic Association, vol. 89(4), pages 1028-1043, September.
  5. Brown, Stephen P. A. & Yucel, Mine K., 2002. "Energy prices and aggregate economic activity: an interpretative survey," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(2), pages 193-208.
  6. Hamilton, James D, 1988. "A Neoclassical Model of Unemployment and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 593-617, June.
  7. Andrew Atkeson & Patrick J. Kehoe, 1995. "Putty-clay capital and energy," Working Papers 548, Federal Reserve Bank of Minneapolis.
  8. Finn, Mary G, 2000. "Perfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 400-416, August.
  9. Pindyck, Robert S & Rotemberg, Julio J, 1983. "Dynamic Factor Demands and the Effects of Energy Price Shocks," American Economic Review, American Economic Association, vol. 73(5), pages 1066-79, December.
  10. Michael R. Darby, 1981. "The Price of Oil and World Inflation and Recession," UCLA Economics Working Papers 228, UCLA Department of Economics.
  11. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June.
  12. In-Moo Kim & Prakash Loungani, 1991. "The role of energy in real business cycle models," Working Paper Series, Macroeconomic Issues 91-6, Federal Reserve Bank of Chicago.
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Cited by:
  1. Nora Traum & Michael Plante, 2012. "Time-Varying Oil Price Volatility and Macroeconomic Aggregates," 2012 Meeting Papers 455, Society for Economic Dynamics.

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