Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-19T06:29:34.816Z Has data issue: false hasContentIssue false
  • English
  • Français

OIL PRICE SHOCKS, SYSTEMATIC MONETARY POLICY, AND THE “GREAT MODERATION”

Published online by Cambridge University Press:  01 February 2009

Ana María Herrera  and
Elena Pesavento
Ana María Herrera*
Affiliation:
Michigan State University
Elena Pesavento
Affiliation:
Emory University
*
Address correspondence to: Ana María Herrera, Department of Economics, Michagan State University, 110 Marshall-Adams Hall, East Lansing, MI 48895; e-mail: herrer20@msu.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

The U.S. economy has experienced a reduction in volatility since the mid-1980s. In this paper we investigate the changes in the response of the economy to an oil price shock and the role of the systematic monetary policy response in accounting for changes in the response of output, prices, inventories, sales, and the overall decline in volatility. Our results suggest a smaller and more short-lived response of most macro variables during the Volcker-Greenspan period. It also appears that whereas the systematic monetary policy response dampened fluctuations in economic activity during the 1970s, it has had virtually no effect after the “Great Moderation.”

Keywords

GDP VarianceStructural BreakVAROil Price ShocksSystematic Monetary Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 1 , February 2009 , pp. 107 - 137
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Ahmed, Shaghil, Levin, Adrew T. and Wilson, Beth Anne (2004) Recent U.S. macroeconomic stability: Good luck, good policies, or good practices? Review of Economics and Statistics 86 (3), 824–832.CrossRefGoogle Scholar
Barsky, Robert B. and Kilian, Lutz (2002) Do we really know that oil caused the great stagflation? A monetary alternative. In Bernanke, B. and Rogoff, K. (eds.), NBER Macroeconomics Annual 2001, pp. 137–183. Cambridge, MA and London: MIT Press.Google Scholar
Bernanke, Ben S., Gertler, Mark and Watson, Mark (1997) Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity 28 (1), 91–142.CrossRefGoogle Scholar
Bernanke, Ben S., Gertler, Mark and Watson, Mark (2004) Reply to “Oil shocks and aggregate macroeconomic behavior: The role of monetary policy: Comment.” Journal of Money, Credit, and Banking 36 (2), 286–291.CrossRefGoogle Scholar
Blanchard, Olivier J. and Simon, John (2001) The long decline in U.S. output volatility, Brookings Papers on Economic Activity 1, 135–173.CrossRefGoogle Scholar
Boivin, Jean and Giannoni, Marc P. (2006) Has monetary policy become more effective? Review of Economics and Statistics 88 (3), 445–462.CrossRefGoogle Scholar
Chauvet, Michelle and Potter, Simon (2001) Recent changes in the U.S. business cycle. Manchester School of Economic and Social Studies 69, 5 (Special Issue 2001), 481–508.Google Scholar
Christiano, Lawrence J., Eichenbaum, Martin and Evans, Charles L. (1999) Monetary policy shocks: What have we learned and to what end? In Taylor, J. and Woodford, M. (eds.), Handbook of Macroeconomics, Vol. 1, Part 1, pp. 65–148. Amsterdam, New York, and Oxford: Elsevier Science.CrossRefGoogle Scholar
Clarida, Richard, Gali, Jordi and Gertler, Mark (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115 (1), 147–180.Google Scholar
Favero, Carlo A. and Rovelli, Riccardo (2003) Macroeconomic stability and the preferences of the Fed: A formal analysis, 1961–98. Journal of Money, Credit and Banking 35 (4), 545–556.Google Scholar
Giordani, Paolo (2004) An alternative explanation of the price puzzle, Journal of Monetary Economics 51 (6), 1271–1296.CrossRefGoogle Scholar
Gonçalves, Silvia and Kilian, Lutz (2004) Bootstrapping autoregressions with conditional heteroskedasticity of unknown form. Journal of Econometrics 123 (1), 89–120.CrossRefGoogle Scholar
Hamilton, James D. (1983) Oil and the macroeconomy since World War II. Journal of Political Economy 91, 228–248.Google Scholar
Hamilton, James D. (1996) This is what happened to the oil price-macroeconomy relationship. Journal of Monetary Economics 38, 215–220.CrossRefGoogle Scholar
Hamilton, James D. (2003) What is an oil shock? Journal of Econometrics 113, 363–398.CrossRefGoogle Scholar
Hamilton, James D. and Herrera, Ana María (2004), Oil shocks and aggregate economic behavior: The role of monetary policy: Comment. Journal of Money, Credit, and Banking 36 (2), 265–286.CrossRefGoogle Scholar
Herrera, Ana María and Pesavento, Elena (2005). The decline in U.S. output volatility: Structural changes and inventory investment. Journal of Business & Economic Statistics 23 (4), 462–472.CrossRefGoogle Scholar
Hooker, Mark A. (2002) Are oil shocks inflationary? Asymmetric and nonlinear specifications versus changes in regime. Journal of Money, Credit and Banking 34 (2), 540–561.CrossRefGoogle Scholar
Humphreys, Brad R., Maccini, Louis J. and Schuh, Scott (2001). Input and output inventories. Journal of Monetary Economics 47, 347–375.CrossRefGoogle Scholar
Ireland, Peter (1999) Does the time-consistency problem explain the behavior of inflation in the United States? Journal of Monetary Economics 44, 279–292.CrossRefGoogle Scholar
Irvine, F. Owen and Schuh, Scott (2002) Inventory Investment and Output Volatility. Federal Reserve Bank of Boston Working Paper.Google Scholar
Ivanov, Ventzislav and Kilian, Lutz (2005) A practitioner's guide to lag order selection for VAR impulse response analysis. Studies in Nonlinear Dynamics and Econometrics 9 (1), Article 2.Google Scholar
Kahn, James A., McConnell, Margaret M. and Perez-Quiros, Gabriel (2001). Inventories and the Information Revolution: Implications for Output Volatility, Federal Reserve Bank of New York Working Paper.Google Scholar
Kilian, Lutz (2008a) Exogenous oil supply shocks: How big are they and how much do they matter for the U.S. economy? Review of Economics and Statistics 90 (2), 216–240.CrossRefGoogle Scholar
Kilian, Lutz (2008b), A comparison of the effects of exogenous oil supply shocks on output and inflation in the G7 countries. Journal of the European Economic Association 6 (1), 78–121.CrossRefGoogle Scholar
Kim, Chang-Jin, Morley, James and Piger, Jeremy (2004) A Bayesian Approach to Counterfactual Analysis of Structural Change. Federal Reserve Bank of St. Louis Working Paper 2004-014C.CrossRefGoogle Scholar
Kim, Chang-Jin and Nelson, Charles R. (1999). Has the U.S. economy become more stable? A Bayesian approach based on a Markov-switching model of business cycle. Review of Economics and Statistics 81 (4), 608–616.Google Scholar
McConnell, Margaret M., Mosser, Patricia C. and Perez-Quiros, Gabriel (1999) A decomposition of the increased stability of GDP growth. Federal Reserve Bank of New York, Current Issues in Economics and Finance 5 (13).Google Scholar
McConnell, Maragaret M. and Perez-Quiros, Gabriel (2000) Output fluctuations in the United States: What has changed since the early 1980s? American Economic Review 90 (5), 1464–1476.CrossRefGoogle Scholar
Mork, Knut A. (1989) Oil and the macroeconomy when prices go up and Down: An extension of Hamilton's results, Journal of Political Economy 91, 740–744.CrossRefGoogle Scholar
Orphanides, Athanasios (2002) Monetary policy rules and the great inflation. American Economic Review Papers and Proceedings 92 (2), 115–120.Google Scholar
Parkin, Michael (1993) Inflation in North America. In Shigehara, Kumiharu (ed.), Price Stabilization in the 1990s, pp. 47–83. London: McMillan Press.CrossRefGoogle Scholar
Vine, Daniel and Ramey, Valerie (2005) Tracking the Source of the Decline in GDP Volatility: An Analysis of the Automobile Industry, Working Paper, http://www.Federalreserve.gov/pubs/Feds/2005/200514/200514abs.html, Finance and Economics Discussion Series 2005-14. Washington, DC: Board of Governors of the Federal Reserve System.Google Scholar
Raymond, Jennie E. and Rich, Robert W. (1997) Oil and the macroeconomy: A Markov state-switching approach. Journal of Money, Credit and Banking 29, 193–213.CrossRefGoogle Scholar
Romer, Christina D. and Romer, David H. (1989) Does monetary policy matter? A new test in the spirit of Friedman and Schwartz. In Blanchard, Olivier J. and Fisher, Stanley (eds.), NBER Macroeconomics Annual 1998, pp. 121–170. Cambridge, MA and London: MIT Press.Google Scholar
Sensier, Marianne and van Dijk, Dick (2004) Testing for changes in volatility of U.S. macroeconomic time series. Review of Economics and Statistics 86, 833–839.Google Scholar
Sims, Christopher A. and Zha, Tao (2006) Does monetary policy generate recessions? Macroeconomic Dynamics 10 (2), 231–272.CrossRefGoogle Scholar
Stock, James H. and Watson, Mark W. (2002) Has the business cycle changed and why? In Gertler, Mark and Rogoff, Kenneth (eds.), NBER Macroeconomics Annual 2002, pp. 159–218. Cambridge, MA and London: MIT Press.Google Scholar
Warnock, M.V. Cacdac and Warnock, Francis E. (2000), The declining volatility of U.S. employment: Was Arthur Burns right? Board of Governors of the Federal Reserve System Finance and Economics Discussion Series No. 2000-677.Google Scholar