Euro Area and Global Oil Shocks: An Empirical Model-Based Analysis

Abstract

We assess the impact of oil shocks on euro-area macroeconomic variables by estimating a new-Keynesian small open economy model with Bayesian methods. Oil price is determined according to supply and demand conditions in the world oil market. We find that the impact of an increase in the price of oil depends upon the underlying sources of variation: when the driver of higher oil prices is an increase in the rest of the world's aggregate demand, both euro-area GDP and CPI inflation increase, whereas negative oil supply shocks and positive worldwide oil-specific demand shocks have stagflationary effects on the euro-area economy. Moreover, the increase in oil prices during the 2004-2008 period did not induce stagflationary effects on the euro-area economy because it was associated with positive aggregate demand shocks in the rest of the world. Similarly, a drop in world aggregate demand helps to explain the recent (2008) simultaneous drop in oil prices, euroarea GDP and inflation -particularly its fuel component.JEL Classification: C11, C51, E32, F41.

The effect of external shocks on Iran's oil economy: a BVAR‐DSGE approach

“…Forni et al . () assess the impact of oil shocks on euro‐area (EA) macroeconomic variables by estimating with Bayesian methods a two‐country New Keynesian model of EA and rest of the world (RW). Oil price is determined according to supply and demand conditions in the world oil market.…”