We thank Karl Shell, Deborah Kerley, John McAdams, participants at the Cornell-Penn State Macro Conference (Fall 2004), two anonymous referees, and the editor, Ken West, for helpful comments. Luís Aguiar-Conraria acknowledges financial support from Fundação para a Ciência e a Tecnologia, grant SFRH-BD-4982-01. The views expressed in the paper and any remaining errors are the authors' alone.
Understanding the Large Negative Impact of Oil Shocks
Article first published online: 8 JUN 2007
Journal of Money, Credit and Banking
Volume 39, Issue 4, pages 925–944, June 2007
How to Cite
AGUIAR-CONRARIA, L. and WEN, Y. (2007), Understanding the Large Negative Impact of Oil Shocks. Journal of Money, Credit and Banking, 39: 925–944. doi: 10.1111/j.1538-4616.2007.00051.x
- Issue published online: 8 JUN 2007
- Article first published online: 8 JUN 2007
- Received January 31, 2005; and accepted in revised form January 30, 2006.
- oil prices;
- real business cycle;
- capacity utilization;
- monopolistic competition;
- multiplier accelerator
This paper offers a plausible explanation for the close link between oil prices and aggregate macroeconomic performance in the 1970s. Although this link has been well documented in the empirical literature, standard economic models are not able to replicate this link when actual oil prices are used to simulate the models. In particular, standard models cannot explain the depth of the recession in 1974–75 and the strong revival in 1976–78 based on the oil price movements in that period. This paper argues that a missing multiplier-accelerator mechanism from standard models may hold the key.