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Working Paper 2005-042B

"Understanding the Large Negative Impact of Oil Shocks"
by Luís Aguiar-Conraria, and Yi Wen

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.

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Category > Monetary Policy/Macroeconomics
Author > Yi Wen
Research Papers and Publications: JEL Code > E32
Research Papers and Publications: JEL Code > E37
Research Papers and Publications: JEL Code > E22