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Understanding the Large Negative Impact of Oil Shocks
Author(s) -
AGUIARCONRARIA LUÍS,
WEN YI
Publication year - 2007
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2007.00051.x
Subject(s) - replicate , economics , oil price , econometrics , aggregate (composite) , recession , multiplier (economics) , macroeconomics , keynesian economics , monetary economics , mathematics , statistics , materials science , composite material
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.