The Changing response to oil price shocks in France : a DSGE type approach
The recent rise in oil prices has brought concern about its eventual impact on economic growth. However, empirical studies seem to be reassuring. Actually, the link between oil prices and GDP growth estimated since the mid 80s is not as strong as it was before the mid 80s. Several explanations have been called to highlight this empirical evidence. One potential explanation is the non-linear or asymmetric nature of the oil price - GDP link. Other explanations are the fact that economies have become less oil-dependent, or changes in rules governing wage and price formation. Developing a fully micro-founded dynamic stochastic general equilibrium model, we examine the relevance of these different interpretations, focusing on France. Non-linear preferences generate oil price - GDP asymmetries that do not in the expected direction, and introducing adjustment cost do not trigger any. The observed diminution in oil intensities explains a reduction by one half in the GDP response to oil-price shocks. The desindexation of wages and prices further flattens the GDP response, but cannot explain the observed lack of GDP response. All these results claim for further analysis, including the examination of causes of the recent oil price hikes.
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- Fiorella de Fiore & Giovenni Lombardo & Viktors Stebunovs, 2006. "Oil Price Shocks, Monetary Policy Rules and Welfare," Computing in Economics and Finance 2006 402, Society for Computational Economics.