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Counterfactual Analyses of Oil Price Shocks using a World Model

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    Abstract

    Oil price shocks have played a dominant role in the macroeconomic development of the world economy over the last twenty five years. In this paper a large, estimated, macro-economic world model with time varying trade weights, monetary and fiscal policy rules and explicit modelling of the behaviour of the OPEC countries is used for counterfactual analyses of oil price shocks. An alternative history with constant real oil prices is developed, showing that the recessions in the OECD area in 1974/75 and in 1980 would have been milder without the preceding oil price hike, while the 1982 recession seems unrelated to oil prices. A separate simulation indicates that the oil price drop in 1985/86 prevented a small recession from developing. The paper also shows that macroeconomic oil price effects vary considerably between the US, Germany and Japan according to the degree of oil dependence, trade with OPEC and the working of domestic labour markets. In particular there are notable differences in inflationary effects in Germany and the US. Results are tested against alternative specifications of monetary and fiscal policy rules.

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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 177.

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    Date of creation: Jul 1996
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    Handle: RePEc:ssb:dispap:177

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    Keywords: Oil price shocks; Macro-economic model; Policy rules;

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    References

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    1. Michael R. Darby, 1981. "The Price of Oil and World Inflation and Recession," UCLA Economics Working Papers 228, UCLA Department of Economics.
    2. Barrell, Ray & Sefton, James, 1997. "Fiscal Policy and the Masstricht Solvency Criteria," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(3), pages 259-79, June.
    3. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
    4. Bohi, Douglas R., 1991. "On the macroeconomic effects of energy price shocks," Resources and Energy, Elsevier, vol. 13(2), pages 145-162, June.
    5. Sachs, Jeffrey, 1982. "The oil shocks and macroeconomic adjustment in the United States," European Economic Review, Elsevier, vol. 18(2), pages 243-248.
    6. John Burbidge & Alan Harrison, 1982. "Testing for the Effects of Oil-Price Rises Using Vector Autoregressions," School of Economics Working Papers 1982-01, University of Adelaide, School of Economics.
    7. Knut Anton Mork & Oystein Olsen & Hans Terje Mysen, 1994. "Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 19-36.
    8. Tatom, John A., 1988. "Are the macroeconomic effects of oil-price changes symmetric?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 325-368, January.
    9. Sachs, Jeffrey, 1982. "The oil shocks and macroeconomic adjustment in the United States," European Economic Review, Elsevier, vol. 18(1), pages 243-248.
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    Cited by:
    1. Paavo Suni, 2008. "Effects of Energy Price Changes on Russian Economy," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 9(2), pages 9-15, 07.
    2. Torbjørn Eika & Knut A. Magnussen, 1998. "Did Norway Gain from the 1979-85 Oil Price Shock?," Discussion Papers 210, Research Department of Statistics Norway.
    3. Hilde Christiane Bjørnland, 1997. "Estimating Core Inflation - The Role of Oil Price Shocks and Imported Inflation," Discussion Papers 200, Research Department of Statistics Norway.
    4. Sverre Grepperud, 1997. "Soil Depletion Choices under Production and Price Uncertainty," Discussion Papers 186, Research Department of Statistics Norway.
    5. Eika, Torbjorn & Magnussen, Knut A., 2000. "Did Norway gain from the 1979-1985 oil price shock?," Economic Modelling, Elsevier, vol. 17(1), pages 107-137, January.

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