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Oil and the Great Moderation

  • Anton Nakov


    (Banco de España)

  • Andrea Pescatori


    (Federal Reserve Bank of Cleveland)

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.

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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0735.

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Length: 34 pages
Date of creation: Oct 2007
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Handle: RePEc:bde:wpaper:0735
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