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Understanding the large negative impact of oil shocks

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  • Luis Aguiar-Conraria
  • Yi Wen

Abstract

This paper offers a plausible explanation for the close link between oil prices and aggregate macroeconomic performance in the 1970s. Although this link has been well documented in the empirical literature, standard economic models are not able to replicate this link when actual oil prices are used to simulate the models. In particular, standard models cannot explain the depth of the recession in 1974-75 and the strong revival in 1976-78 based on the oil price movements in that period. This paper argues that a missing multiplier-accelerator mechanism from standard models may hold the key.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-042.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2005-042

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Keywords: Petroleum industry and trade ; Prices;

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