Oil and Macroeconomic (In)Stability

We analyze the role of oil price volatility in reducing US macroeconomic instability. Using a Markov Switching Rational Expectation New Keynesian model we revisit the timing of the Great Moderation and the sources of changes in the volatility of macroeconomic variables. We find that smaller or fewer...

Full description

Saved in:
Bibliographic Details
Published in:American economic journal. Macroeconomics 2018-10, Vol.10 (4), p.128-151
Main Authors: BjØrnland, Hilde C., Larsen, Vegard H., Maih, Junior
Format: Article
Language:English
Subjects:
Economic models
Inflation
Keynesian theory
Macroeconomics
Monetary policy
Prices
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We analyze the role of oil price volatility in reducing US macroeconomic instability. Using a Markov Switching Rational Expectation New Keynesian model we revisit the timing of the Great Moderation and the sources of changes in the volatility of macroeconomic variables. We find that smaller or fewer oil price shocks did not play a major role in explaining the Great Moderation. Instead oil price shocks are recurrent sources of economic fluctuations. The most important factor reducing overall variability is a decline in the volatility of structural macroeconomic shocks. A change to a more responsive (hawkish) monetary policy regime also played a role.
ISSN:1945-7707
1945-7715
DOI:10.1257/mac.20150171