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Oil Price Shocks and the U.S. Stagflation of the 1970s: Some Insights from GEM

  • Benjamin Hunt
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    Using a variant of the IMF's Global Economy Model (GEM), featuring energy as both an intermediate input into production and a final consumption good, this paper examines the macroeconomic implications of large increases in the price of energy. Within a fully optimizing framework with nominal and real rigidities arising from costly adjustment, large increases in energy prices can generate inflation persistence similar to that seen in the 1970s if the monetary authority misperceives the economyÕs supply capacity and workers are able to temporarily resist some of the erosion in their real consumption wages resulting from the energy price increase. In the absence of these two responses, the model suggests that energy price shocks cannot generate the type of stagflation witnessed in the 1970s. The analysis goes some way toward reconciling the results found in the empirical literature on the changing nature of the macroeconomic implications of oil price shocks.

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    Article provided by International Association for Energy Economics in its journal The Energy Journal.

    Volume (Year): Volume 27 (2006)
    Issue (Month): Number 4 ()
    Pages: 61-80

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    Handle: RePEc:aen:journl:2006v27-04-a03
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