Why No Oil Shock Effect?
By Arnold Kling
Since the 1970s, and at least until recently, macroeconomists have viewed changes in the price of oil as as an important source of economic fluctuations, as well as a paradigm of a global shock, likely to affect many economies simultaneously. Such a perception is largely due to the two episodes of low growth, high unemployment, and high inflation that characterized most industrialized economies in the mid and late 1970s.
…The events of the past decade, however, seem to call into question the relevance of oil price changes as a signficant source of economic fluctuations. The reason: Since the late 1990s, the global economy has experienced two oil shocks of sign and magnitude comparable to those of the 1970s but, in contrast with the latter episodes, GDP growth and inflation have remained relatively stable in much of the industrialized world.
In trying to explain the difference, what is the first hypothesis that comes to mind? For me, it is the fact that this time around we are not making things worse through the disorder of price controls. But the authors do not even consider that hypothesis. Instead, they consider better luck (meaning fewer other shocks), less wage rigidity, better monetary policy, and a less oil-sensitive economy.
All perfectly reasonable hypotheses, but not enough to justify overlooking the order vs. disorder hypothesis.
And the empirical methodology–vector autoregressions. For my money, you cannot do anything less convincing.
Blanchard (5 votes in the Rodrik poll) was, like Krugman, a couple years ahead of me at MIT. Krugman’s success as a columnist reflects a lay readership with tastes than differ from mine. Blanchard’s success reflects an economics profession with tastes that differ from mine. Most top economists value mathematical grinding more highly than I do.