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Understanding the Impact of Oil Shocks

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Author Info
Luís Francisco Aguiar-Conraria () (Universidade do Minho - NIPE)
Yi Wen (Department of Economics - Cornell University)

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Abstract

This paper provides new empirical evidence on and theoretical support for the close link between oil prices and aggregate macroeconomic performence in the 1970s. Although this link has been well documented in the empirical literature and is further confirmed in this paper, standard economic models are not able to replicate this link when actual oil prices are used to stimulate the models. In particular, standard models cannot explain the depht 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. This multipliplier-accelerator mechanism not only exacerbated the impact of the oil schocks in 1973-74 but also helped create the temporary recovery in 1976-1978. This paper derives the missing multiplier-accelarator mechanism from externalities in general equilibrium. Our calibrated model can explain both the recession in 1974-75 and revival in 1976-78.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 2/2005.

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Date of creation: 2005
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Handle: RePEc:nip:nipewp:2/2005

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Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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Related research
Keywords: Oil price shocks; Real business cycle; indeterminacy; capacity utilization; externalities; monopolistic competition.;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

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References listed on IDEAS
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