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Effects of oil price shocks on German business cycles

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  • Tobias Zimmermann
  • Torsten Schmidt

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Abstract

In this paper we analyse to what extend movements in oil prices can help to explain business cycle fluctuations in Germany. To clarify whether oil price shocks have effects on real economic activity in Germany at all we use two different versions of a real business cycle model namely a closed and a small open economy version and introduce oil as an additional factor in the production function. Like in the related literature (Kim and Loungani 1992; de Miguel et al. 2003) in both versions oil price shocks have effects on real economic activity. In a second step we use these models to analyse whether the effects of oil price movements have changed over time. Our hypothesis is that the effects decreased since the seventies because oil use became a less important factor for industrial production. Therefore we split our data set into two subperiods namely from 1970 to 1986 and from 1987 to 2000 and calibrate our models to both subsets. In this model economy oil price shocks contribute substantially to business cycle fluctuations in the seventies and early eighties but only to a very limited extend in the late eighties and nineties

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 212.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:212

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Keywords: oil prices; business cycles; small open economy;

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References

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  1. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  2. Asche, Frank & Gjolberg, Ole & Volker, Teresa, 2003. "Price relationships in the petroleum market: an analysis of crude oil and refined product prices," Energy Economics, Elsevier, vol. 25(3), pages 289-301, May.
  3. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  4. Alfred Maussner & Julius Spatz, 2006. "Determinants of business cycles in small scale macroeconomic models: the German case," Empirical Economics, Springer, vol. 31(4), pages 921-950, November.
  5. Sylvain Leduc & Keith Sill, 2001. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Working Papers 01-9, Federal Reserve Bank of Philadelphia.
  6. Finn E. Kydland & Edward C. Prescott, 1994. "The computational experiment: an econometric tool," Staff Report 178, Federal Reserve Bank of Minneapolis.
  7. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-77, November.
  8. Thomas Harjes, 1997. "Real business cycles in an open economy: An application to Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(4), pages 635-656, December.
  9. Correia, Maria Isabel Horta & Neves, Joao C & Rebelo, Sérgio, 1994. "Business Cycles in a Small Open Economy," CEPR Discussion Papers 996, C.E.P.R. Discussion Papers.
  10. Peter Brandner & Klaus Neusser, 1992. "Business cycles in open economies: Stylized facts for Austria and Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(1), pages 67-87, March.
  11. Kim, In-Moo & Loungani, Prakash, 1992. "The role of energy in real business cycle models," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 173-189, April.
  12. Carlos de Miguel & Baltasar Manzano & Jose M. Martin-Moreno, 2003. "Oil Price Shocks and Aggregate Fluctuations," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 47-61.
  13. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
  14. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
  15. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
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Cited by:
  1. Andreas Löschel & Ulrich Oberndorfer, 2009. "Oil and Unemployment in Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 229(2-3), pages 146-162, June.
  2. Torsten Schmidt & Tobias Zimmermann, 2007. "Why are the Effects of Recent Oil Price Shocks so Small?," Ruhr Economic Papers 0029, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. Schubert, Stefan Franz, 2009. "Dynamic Effects of Oil Price Shocks and their Impact on the Current Account," MPRA Paper 16738, University Library of Munich, Germany.

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