Oil prices, monetary policy, and the macroeconomy
Every U.S. recession since 1971 has been preceded by two things: an oil price shock and an increase in the federal funds rate. Bernanke, Gertler, and Watson (1997,2004) investigated how much oil price shocks have contributed to output growth by asking the following counterfactual question: Empirically how much would we expect oil price increases to have contributed to output growth if the Fed had kept the rate constant instead of letting it increase? They concluded that, at most, half of the observed output declines can be attributed to oil price increases. Most were actually caused by funds rate increases. A problem with their empirical analysis, however, is that it implicitly assumes that the Fed can continually “fool” the public. That is, the funds rate is led constant even though the public actually expects the Fed to follow its historical policy rule of raising the funds rate in conjunction with oil price increases. We show that if the new policy rule were anticipated oil price increases would have had a much larger impact on output than suggested by Bernanke, Gertler, and Watson’s analysis.
Volume (Year): (2005)
Issue (Month): Apr ()
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999.
"Optimal Monetary Policy with Staggered Wage and Price Contracts,"
Computing in Economics and Finance 1999
1151, Society for Computational Economics.
- Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
- Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University.
- Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Sims, Christopher A. & Zha, Tao, 2006.
"Does Monetary Policy Generate Recessions?,"
Cambridge University Press, vol. 10(02), pages 231-272, April.
- Hamilton, James D & Herrera, Ana Maria, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 265-86, April.
- Bernanke, Ben S & Gertler, Mark & Watson, Mark W, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 287-91, April.
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