The paper “ Systematic Monetary Policy and the Effects of Oil Price Shocks” is a spectacular variant of the case study on macro & microeconomics. In this research paper, we will look at the major effects that increases in oil prices have on the global economy. In our paper, we will first look at the theory provided by the IMF, with regards to this topic and then we will look at a critical theory which is in contrast to what the IMF has to say, hence, provided us with a holistic picture on this matter. In recent months, oil prices are certainly below their August 2006 peaks.
However, there are still concerns that unless we carry out measures for cutting short demand for oil and create extra ability, oil price variability may continue to pose significant risks for the global economy. A customary perception based on what happened in the 1970s is that oil price shocks trigger recessions. However, the recent past does not fit this view— oil prices are about 2 1/2 times their 2002 levels— but this increase has seemingly not had much impact on the global economy.
This seeming puzzle has brought attention to the need to identify the sources of the oil price increase, in particular, to distinguish the role of supply and demand reasons. This box examines these issues using an extended version of the Global Economy Model (GEM) to analyze the causes and outcomes of changes in oil prices. It also looks at the global macro-economic impact of higher taxes on petroleum products. It is important to this clear this from the beginning the analysis does not take on to assess the relative importance of demand and supply causes in the recent run-up in oil prices.
In contrast, the main focus is on patterning the channels through which oil prices and growth interact. Global Macro-economic Implications of a Supply Impelled Oil Price Hike First: take the case where oil-exporting economies restrict the supply of oil (as in the 1970s). Oil prices rise sharply (100 percent at the peak of the simulation) and this results in a global slowdown as redistribution of income to the oil-exporting economies, which have a lower inclination to spend than the oil-importing economies.
1. IMF (2007): World Economic Outlook, April 2007, Washington, D.C.: IMF.
2. Paul Segal (2007) “A note on oil prices and the world economy in the IMF’s World Economic Outlook” Research Fellow, Oxford Institute for Energy Studies and New College, Oxford.
3. Bernanke, Ben S., Mark Gertler, and Mark Watson (1997): “Systematic Monetary Policy and the Effects of Oil Price Shocks,” Brookings Papers on Economic Activity 1, 91– 142.
4. Elekdag, Selim, René Lalonde, Douglas Laxton, Dirk Muir, and Paolo Pesenti (2007): “Oil Price Movements and the Global Economy: A Model-Based Assessment”, Bank of Canada, Working Paper 2007-34.
5. Roubini, Nouriel (2004) “The effects of the recent oil price shock on the U.S. and global economy” Stern School of Business, NYU and Brad Setser Research Associate, Global Economic Governance Programme, University College, Oxford