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Oil Price Shocks, Monetary Policy and Stagflation

In: Inflation in an Era of Relative Price Shocks

  • Lutz Kilian

    (University of Michigan)

One of the central questions in recent macroeconomic history is to what extent monetary policy as opposed to oil price shocks contributed to the stagflation of the 1970s. Understanding what went wrong in the 1970s is the key to learning from the past. One explanation explored in Barsky and Kilian (2002) is that worldwide shifts in monetary policy regimes not related to the oil market played a major role in causing both the major oil price increases of the 1970s and stagflation in many economies. A competing view exemplified by Bernanke, Gertler and Watson (1997) is that the oil price shocks of the 1970s and 1980s arose exogenously with respect to global macroeconomic conditions, but were propagated by the reaction of monetary policy makers, causing stagflation in the process. This paper reviews the evidence for these two main explanations, interprets recent events in light of this evidence, and outlines implications for monetary policy.

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This chapter was published in: Renée Fry & Callum Jones & Christopher Kent (ed.) Inflation in an Era of Relative Price Shocks, Reserve Bank of Australia, pages , 2010.
This item is provided by Reserve Bank of Australia in its series RBA Annual Conference Volume with number acv2009-04.
Handle: RePEc:rba:rbaacv:acv2009-04
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  1. Hicks, Bruce & Kilian, Lutz, 2009. "Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008?," CEPR Discussion Papers 7265, C.E.P.R. Discussion Papers.
  2. Bruno, Michael & Sachs, Jeffrey, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K. Manufacturing," Review of Economic Studies, Wiley Blackwell, vol. 49(5), pages 679-705, Special I.
  3. Robert Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," NBER Working Papers 10855, National Bureau of Economic Research, Inc.
  4. Lutz Kilian & Clara Vega, 2011. "Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 660-671, May.
  5. den Haan, Wouter J., 2000. "The comovement between output and prices," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 3-30, August.
  6. Alquist, Ron & Kilian, Lutz, 2007. "What Do We Learn from the Price of Crude Oil Futures?," CEPR Discussion Papers 6548, C.E.P.R. Discussion Papers.
  7. Michael Bruno & Jeffrey Sachs, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K.Manufacturing," NBER Working Papers 0851, National Bureau of Economic Research, Inc.
  8. Lutz Kilian, 2009. "Pitfalls in Estimating Asymmetric Effects of Energy Price Shocks," 2009 Meeting Papers 473, Society for Economic Dynamics.
  9. repec:cup:cbooks:9780521898010 is not listed on IDEAS
  10. Anton Nakov & Andrea Pescatori, 2007. "Inflation-output gap trade-off with a dominant oil supplier," Working Paper 0710, Federal Reserve Bank of Cleveland.
  11. Kilian, Lutz & Rebucci, Alessandro & Spatafora, Nikola, 2009. "Oil shocks and external balances," Journal of International Economics, Elsevier, vol. 77(2), pages 181-194, April.
  12. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
  13. Edelstein Paul & Kilian Lutz, 2007. "The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses about the Transmission of Energy Price Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-41, November.
  14. James D. Hamilton, 2010. "Causes and consequences of the oil shock of 2007–08," CQER Working Paper 2009-02, Federal Reserve Bank of Atlanta.
  15. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2007. "Oil shocks and external adjustment," International Finance Discussion Papers 897, Board of Governors of the Federal Reserve System (U.S.).
  16. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 766-779, September.
  17. Kilian, Lutz, 2007. "The Economic Effects of Energy Price Shocks," CEPR Discussion Papers 6559, C.E.P.R. Discussion Papers.
  18. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
  19. Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc.
  20. 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.
  21. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
  22. Kilian, Lutz & Lewis, Logan, 2009. "Does the Fed Respond to Oil Price Shocks?," CEPR Discussion Papers 7594, C.E.P.R. Discussion Papers.
  23. Kilian, Lutz & Park, Cheolbeom, 2007. "The Impact of Oil Price Shocks on the U.S. Stock Market," CEPR Discussion Papers 6166, C.E.P.R. Discussion Papers.
  24. Eyal Dvir & Kenneth S. Rogoff, 2009. "Three Epochs of Oil," NBER Working Papers 14927, National Bureau of Economic Research, Inc.
  25. Kilian, Lutz, 2005. "The Effects of Exogenous Oil Supply Shocks on Output and Inflation: Evidence from the G7 Countries," CEPR Discussion Papers 5404, C.E.P.R. Discussion Papers.
  26. Lutz Kilian, 2008. "A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 78-121, 03.
  27. repec:cup:cbooks:9780521725200 is not listed on IDEAS
  28. Lutz Kilian, 2010. "Explaining Fluctuations in Gasoline Prices: A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 87-112.
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