The Macroeconomics of Oil.pdf - The macroeconomics of oil Olivier Blanchard September 2006 Nr 1 Four relevant dimensions \u2022 On the supply side Increase

The Macroeconomics of Oil.pdf - The macroeconomics of oil...

This preview shows page 1 - 5 out of 12 pages.

The macroeconomics of oil Olivier Blanchard September 2006 Nr. 1
Image of page 1
Four relevant dimensions On the supply side: Increase in cost for oil-using sectors. Main issue: Wage adjustment. On the demand side: Transfer from oil importers to oil exporters. Three main issues: Effect on world saving, and the world interest rate. Effect on the relative demand for goods, and the dollar exchange rate. Effect on the relative demand for assets, and the dollar exchange rate. Nr. 2
Image of page 2
1. Oil, real wages, and unemployment. Given wage, increase in the price of oil leads to increase in price level, and thus decrease in real (consumption) wage. How large? Roughly: Ratio of expenditures on oil and gas as interme- diate inputs to value added, times relative change in oil price. For US, ratio around 2.0%. Increase from 2002 to 2006: 100%, so required decrease in real wage: -2% . Outcome then depends on: Real wage resistance : Wage increases, further price increases. Monetary policy : If accommodating: Inflation. If tough: Higher unem- ployment needed to limit wage increases. Current monetary policy wisdom: Yes to first round/no to second round price increases: Tough. Nr. 3
Image of page 3
How could things go so wrong in the 1970s? Puzzle: Required wage adjustment small, relative to fluctuations in produc- tivity growth from year to year.
Image of page 4
Image of page 5

You've reached the end of your free preview.

Want to read all 12 pages?

  • Fall '09
  • JOESMITH

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes