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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.
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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

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