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Oil and the Great Moderation

Author

Listed:
  • Anton Nakov

    () (Banco de España)

  • Andrea Pescatori

    () (Federal Reserve Bank of Cleveland)

Abstract

We assess the extent to which the great US macroeconomic stability since the mid-1980s can be accounted for by changes in oil shocks and the oil share in GDP. To do this we estimate a DSGE model with an oil-producing sector before and after 1984 and perform counterfactual simulations. We nest two popular explanations for the Great Moderation: (1) smaller (non-oil) real shocks; and (2) better monetary policy. We find that the reduced oil share accounted for as much as one-third of the inflation moderation, and 13% of the growth moderation, while smaller oil shocks accounted for 11% of the inflation moderation and 7% of the growth moderation. This notwithstanding, better monetary policy explains the bulk of the inflation moderation, while most of the growth moderation is explained by smaller TFP shocks.

Suggested Citation

  • Anton Nakov & Andrea Pescatori, 2007. "Oil and the Great Moderation," Working Papers 0735, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0735
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    References listed on IDEAS

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    More about this item

    Keywords

    Great Moderation; oil shocks; Bayesian estimation; counterfactual simulations;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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