Disentangling the effects of oil shocks: the role of rigidities and monetary policy

Transcription

1 Disenangling he effecs of oil shocks: he role of rigidiies and moneary policy Carlos de Miguel, Balasar Manzano, José Mª Marín-Moreno and Jesús Ruiz Universidad de Vigo and rede Universidad Compluense de Madrid and ICAE

2 Moivaion Since he 970 s, oil shocks have received a grea deal of aenion from economiss: many auhors have cied oil shocks as he main facor behind he episode of sagflaion in he 970 s, analyzing he impac of oil shocks on oupu and inflaion. By he mid-980 s, i was believed ha he macroeconomic effecs of oil shocks had changed over ime. Thus emerged a lieraure on he so-called Grea Moderaion, which refers o he decrease in GDP volailiy over he previous hree decades. In his analysis, he lower effecs of oil shocks on he economy are poined ou as a poenial explanaion. 2

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5 Objecive Using a new Keynesian, sochasic, dynamic model of a small open moneary economy ha impors oil and applying i o he Spanish economy, his paper addresses he quesion of why he effecs of oil shocks from he mid-980 s on oupu and inflaion were smaller. 5

6 We differ from he previous lieraure in wo ways: ) We analyze he case for he Spanish economy, which is differen in many ways from he U.S. economy: i is less flexible in boh he labor and goods markes. 2) Mehodologically, we depar from he empirical VAR analysis presen in he lieraure. Insead, we esimae srucural parameers and srucural shocks in he framework of Dynamic Sochasic General Equilibrium Models (DSGE). 6

7 The VAR mehodology has an imporan limiaion in he sense ha he esimaed shocks canno be inerpreed direcly in economic erms, because hey arise from a reduced form. Those shocks are a funcion, perhaps nonlinear, of he srucural shocks, and idenificaion assumpions are needed o undersand he economic meaning of he esimaed shocks. Recen developmens of economeric and numerical echniques allow for esimaing srucural parameers and srucural shocks in he framework of Dynamic Sochasic General Equilibrium Models (DSGE). Those echniques overcome he idenificaion assumpion problem of he VAR mehodology, making DSGE models a more appealing alernaive for our purpose. 7

8 Previous lieraure. Hamilon (983 and 2009): sudies he correlaion beween oil price shocks and economic downurns, from an empirical poin of view. Whereas hisorical oil price shocks were primarily caused by physical disrupions of supply, he price run-up of was caused by srong demand confroning sagnaing world producion. Alhough he causes were differen, he consequences for he economy appear o have been very similar o hose observed in earlier episodes, [ ]. 2. Kim and Loungani (992), Finn (2000), Roemberg and Woodford (996), Backus and Crucini (2000) and De Miguel, Manzano and Marín-Moreno (2003, 2006): hose papers address he quesion of wheher sandard models can accoun for he observed effecs of oil price shocks, from a heoreical poin of view. 8

9 3. Bohi (989, 99) and Bernanke, Gerler and Wason (997) show ha he effecs of an oil shock would depend on he response of moneary policy in miigaing i. 4. Herrera and Pesaveno (2009) and Blanchard and Gali (2008) examine several hypoheses for explaining he weaker effecs of oil shocks from he mid-980 s. Boh papers consider changes in moneary policy, finding ha changes in moneary rule can explain some of he lesser effecs of oil shocks on oupu and inflaion. 5. Blanchard and Gali (2008) also consider oher hypoheses, including more flexible labor markes and a smaller share of oil in producion. All hose papers follow a VAR mehodology, alhough Blanchard and Gali also consider a new Keynesian model, only for he purpose of illusraing he empirical VAR resuls. 9

10 Our paper We specify, esimae and simulae a moneary new Keynesian DSGE model of a small open economy ha uses impored oil o produce. The economy is subjec o rigidiies in boh he goods and he labor markes and is hied by hree ypes of shocks: i) Produciviy, ii) moneary and iii) oil shocks. The resuls of he paper suppor he hypohesis of smaller macroeconomic effecs of oil shocks from he mid-980 s. Those resuls emerge from he differen feaures of he economy: boh labor marke rigidiies and he oil share have decreased over ime and he moneary policy has changed in ha i is more focused on conrolling inflaion. 0

11 The model The model consiss of a represenaive household wih real balances in he uiliy funcion à la Sidrauski, a represenaive firm ha produces he final good, a coninuum of inermediae goods-producing firms and a moneary auhoriy. Since inermediae commodiies are imperfec subsiues in he producion of he final good, he represenaive firm producing inermediae commodiies sells is producion in a monopolisic compeiion marke a a price ha depends on he demand by he firm producing he final good.

12 We assume ha he firm producing inermediae commodiies uses labor and oil as inpus and is hied by an exogenous produciviy shock: 2 ln( z) = ρzln( z ) + εz, ρz <, εz N(0, σz). iid Tha firm faces quadraic coss for adjusing nominal prices beween periods. These coss are responsible for he price rigidiy in his model. There are also real wage rigidiies in he labor marke. The real price of oil is assumed o be exogenous, following a sochasic process: e e e 2 ln( p ) = p + ϕ e ln( p ) e, e, e (0, e). p + ε ϕ < ε N σ p, p p, iid p 2

13 The moneary auhoriy follows a Taylor rule, adjusing ineres raes for he seady sae deviaions of inflaion and oupu and he difference beween domesic and inernaional ineres raes. * + i + π y ln( + i) = ln( + i ) + ρiln ρ ln ln * + π + ρy + εi,, + iss + π ss yss ε σ 2 where i, N(0, i ). iid The parameers of he model are esimaed using Kalman filer echniques. We have differen ses of esimaed parameers depending on he sample considered. Finally, he model is simulaed in order o obain impulse response and variance decomposiion of he differen shocks. 3

14 Findings: Table. Parameers. PREFERENCES β 97:-2007:2 97:-988:2 988:3-2007: (0.0056) (0.0052) (0.006) θ (calibraed parameer) σ (0.0035) (0.025) (0.0086) ψ (calibraed parameer) TECHNOLOGY ε α α 2 RIGIDITIES.348 (0.095) (0.0689) (0.042).3666 (0.044) (0.0735) (0.0409).9873 (0.0594) (0.0034) (0.0294) Lower oil/oupu share η (0.0000) φ (0.003) TECHNOLOGICAL SHOCK (0.0000) (0.029) (0.0000) (0.0655) Lower labor marke rigidiies ρ z σ z (0.0007) (0.002) (0.0003) (0.0027) (0.0002) (0.0034) 4

15 OIL PRICES (esimaed AR() process) e p ϕ e p (0.0269) σ e p (0.0033) TAYLOR RULE ρ i ρ Π ρ y σ i (0.0020) (0.053) (0.0006) 0.09 (0.006) (0.049) 0.96 (0.0066) (0.000) (0.0073) 0.02 (0.0003) (0.0022) (0.0487) (0.0032) (0.000) (0.0054) (0.0003) (0.002) Lower oil shocks MP se o conrol inflaion Lower moneary shocks Log Likelihood Correlaion(y, yˆ ) ˆ β y, yˆ R 2 Correlaion(π, ˆ π ) ˆ β, ˆ R 2 π π Model fis he daa well Sandard deviaion of esimaed parameers is in parenheses. The series of oil prices has been normalized so ha is average is. Correlaion(y, yˆ ), Correlaion(π, ˆ π ), represen measures of how well our model fis he daa. 5

16 From his able, we can exrac imporan differences in some parameers ha will drive he model simulaion resuls. As a maer of fac, many of hose differences correspond o he explanaions suggesed by he lieraure ha oil shocks have had less macroeconomic impac since he OPEC collapse in 986 [see Herrera and Pesaveno (2009) and Blanchard and Galí (2008), among ohers]. Those explanaions are suppored by our parameer esimaions by suggesing a more flexible labor marke, changes in moneary policy, a lower oil share in he economy and smaller oil shocks. 6

17 Simulaion resuls.. Variance Decomposiion Table 2. The conribuion (%) of produciviy shocks, moneary shocks and oil price shocks o oupu (y) flucuaions. 97:-2007:2 97:-988:2 988:3-2007:2 Periods Produciviy Moneary Oil Price Produciviy Moneary Oil Price Produciviy Moneary Oil Price Inf

18 Table 3. The conribuion (%) of produciviy shocks, moneary shocks and oil price shocks o inflaion (π ) flucuaions. 97:-2007:2 97:-988:2 988:3-2007:2 Periods Produciviy Moneary Oil Price Produciviy Moneary Oil Price Produciviy Moneary Oil Price Inf

19 Table 4. The conribuion (%) of produciviy shocks, moneary shocks and oil price shocks o hours worked (h) flucuaions. 97:-2007:2 97:-988:2 988:3-2007:2 Periods Produciviy Moneary Oil Price Produciviy Moneary Oil Price Produciviy Moneary Oil Price Inf

20 Table 5. The conribuion (%) of produciviy shocks, moneary shocks and oil price shocks o real money holdings (m) flucuaions. 97:-2007:2 97:-988:2 988:3-2007:2 Periods Produciviy Moneary Oil Price Produciviy Moneary Oil Price Produciviy Moneary Oil Price Inf

21 Figure. Impulse response o a produciviy shock.5 oupu 0 inflaion periods periods 0 hours worked 8 real money holdings periods periods.5 oil 97:-2007:2 97:-988:2 988:3-2007: periods 2

22 Figure 2. Impulse response o a moneary shock 0 oupu 0 inflaion periods periods 0 hours worked 0 real money holdings periods periods 0 - oil 97:-2007:2 97:-988:2 988:3-2007: periods 22

23 Figure 3. Impulse response o an oil price shock. 0 oupu.5 inflaion periods periods 3 hours worked 0 real money holdings periods periods 0-5 oil 97:-2007:2 97:-988:2 988:3-2007: periods 23

24 Summary a. In his paper, we analyze he naure of he apparen changes in he macroeconomic effecs of oil shocks, as well as some of heir possible causes. b. We depar from he previous lieraure on his opic by simulaing a heoreical model whose parameers are esimaed using Kalman Filer echniques. c. We use a new Keynesian, sochasic, dynamic model of a small open moneary economy ha impors oil and apply i o he Spanish economy. 24

25 d. We consider hree differen ses of esimaed parameers depending on he sample considered: he oal sample 97:-2007:2 and he subsamples 97:-988:2 and 988:3-2007:2. The firs subsample includes he wo grea oil crises of he 970 s and he significan drop in oil prices a he beginning of 986. The second par of he sample corresponds o he so-called Grea Moderaion. e. The main resul is ha he macroeconomic effecs of oil price shocks have changed over ime. We find he effecs on oupu, inflaion, hours worked and real money holdings are higher during he sample ha includes he firs wo oil crises. 25

26 f. We find ha, in general, moneary policy is more imporan in he firs par of he sample when i comes o explaining flucuaions in oupu, inflaion and real money holdings. This corresponds o he more sabilizing role ha moneary policy had in he 970 s compared o recen years, in which moneary policy is clearly designed o conrol inflaion. g. Finally, produciviy shocks are more imporan in he second subsample when explaining oupu, hours worked and real money holding flucuaions, due o he lower weigh of moneary policy and he lesser effec of oil price shocks. 26

27 Households max { c, h, M, B } + + E 0 = 0 β c θ M + P σ σ ψh c s..: M B M B T D wh P P( + i) P P P P, given M 0 and B 0 27

28 We assume real wage rigidiies by modifying ad hoc he following equaion: ψ = w c σ ( ) m θ σ ( + η) ψ c m σ θ ( σ ) = w, where η represens an index of he degree of real wage rigidiies. 28

29 The represenaive finished goods-producing firm During each period =0,,2,, his firm produces y unis of he final good by using as inpus y (j) unis of each inermediae good for j [ 0,], purchased a price P( j ). The firm uses a consan reurn o scale echnology described by: ε ( ε )/ ε ε 0 y ( j) dj y, ε >. And i solves he following problem subjec o is echnology, max Py P( j) y ( j) dj 0 Π =. 29

30 The represenaive inermediae goods-producing firm In each period, he j-h firm uses labor h( j) and oil (e ) o produce he inermediae good, y ( j ). The j-h firm exhibis he echnology: α α2 zh( j) e( j) y( j), α + α (0,], 2 where z is an aggregae echnological shock, common o all firms, ha follows he auoregressive process, 2 ln( z) = ρzln( z ) + εz, ρz <, εz N(0, σz). iid 30

31 Oil is purchased in an inernaional oil marke a a real price be exogenous and following a sochasic process: e p ha we assume o e e e 2 ln( p ) = p + ϕ e ln( p ) e, e, e (0, e). p + ε ϕ < ε N σ p, p p, iid p 3

32 Inermediae goods subsiue imperfecly o produce he final good. Thus, he represenaive inermediae good-producing firm sells is producion in a monopolisic compeiion marke a a price ha depends on he demand by he firm producing he final good and facing a quadraic cos of changing nominal price as specified in Roemberg (982): φ P ( j) 2 ( + π ss ) P ( j) where φ 0 and π ssdenoes he seady sae rae of inflaion. 2 y, 32

33 The marke value maximizaion problem of he represenaive j-h firm producing inermediae commodiies is: max E 0 D ( j) βλ = 0 P, ε s..: y ( j) = [ P( j)/ P] y, j [ 0,] zh j e j y j α α2 ( ) ( ) ( ), α + α (0,] 2 where D ( j) P( j) φ = y ( j) wh( j) p e ( j) P( j) y e P P 2 ( + π ss) P ( j) 2 and β λ /P represens for he represenaive household he value of he marginal uiliy of an addiional moneary uni received as dividends in period. 33

34 The moneary auhoriy The moneary auhoriy implemens policy by adjusing he nominal rae of ineres, i, in response o deviaions of he final oupu, y, he inflaion π, and an exogenous inernaional ineres rae, i *, wih respec o heir respecive seady-sae values { y, π, i }: * ss ss ss * + i + π y ln( + i) = ln( + i ) + ρiln ρ ln ln * + π + ρy + εi,, + iss + π ss yss ε σ 2 where i, N(0, i ). iid Finally, he moneary auhoriy finances he lump-sum ransfers: T M+ M = = m m. P P P + π 34

35 The equilibrium We consider a symmeric equilibrium in which all inermediae commodiyproducing firms make he same decisions: y ( j) = y( ), h( j) = h, P( j) = P and D ( j)/ P = D / P. Ne expors in his model include oil purchases as well as purchases of bonds. In equilibrium we assume ha ne expors are zero a each period so ha oil purchases are financed by varying he ne holding bonds: [ B / ( )] [ / ] e + P + i B P + pe = 0. 35

36 Wih hese condiions, equilibrium is summarized in he following sysem: 2 φ π π ss y = c + y, () 2 + π ss ( + ηψ ) α pe c m h e =, (2) σ θ( σ) α2 θ c i m = + i, (3) σ θ( σ) σ θ( σ) c m = β ( + i) E c+ m+, (4) + π + y 2 z h α α = e, (5) ln( z ) = ρ ln( z ) + ε, (6) z z, 36

37 e π π ss + π p φ = ( ε) + ε +... α α2 + πss + πss α2zh e c m z h e + βe c m zh e α α2 π π π α α2 + π + π σ θ( σ) ss φ σ θ( σ) ss ss + i + π y ln( + i ) = ln( + i ) + ρ ln + ρ ln + ρ ln + ε * i * π y i, + iss + π ss yss, (7), (8) These eigh equaions deermine he equilibrium values for: {c, y, π, m, e, h, i, z }, given { i *, e p, ε }. 37

38 Mehodology The firs-order condiions ()-(8) can be log-linearized around he seady sae. Applying he mehod of Blanchard and Kahn (980), we can obain a soluion of he form of a sae-space economeric model. The empirical model akes he form: ξ = Fξ + Bx + Dυ + + d = A' x + H' ξ where ξ [ iˆ, zˆ, ε ]', + + i, + d cˆ ˆ x pˆ iˆ D 0 e * ( 2) [, π]', [, ]', υ+ [ εz, +, εi, + ]',, I (2 2) wih fˆ ln( f / f ), for f i, z, c, π, p, i e * = ss =. 38

39 When applied o his sae-space sysem, he Kalman filer delivers forecass of he hree unobserved saes, [ i ˆ ˆ, z+, εi, + ]', condiional on all observed values of [ cˆ, ˆ π ]' and ˆ e [ p, ˆ* i ]'. These forecass can be recursively obained as follows: ξ ˆ ˆ ˆ + = Fξ + K( d A' x H' ξ ) + Bx, P = FP F' K H' P F' + Q ', + 2 σ 0 z K = FP H( H' P H), Q = D( cov( υ+ ) ) D',cov( υ + ) = 2, 0 e σ p where ξˆ + Eˆ( ξ+ Ω ), Ω ( d ', d ',... d ', x ', x ',..., x')', P ˆ ˆ ˆ + E ( + + )( + + )' ξ ξ ξ ξ, given ˆξ 0 and P 0. 39

40 The parameers of he empirical model can be esimaed via maximum likelihood using mehods described by Hamilon (994, Ch. 3), given he ime series { e, * } p i as exogenous variables and using Spanish quarerly ime series of consumpion and inflaion{, } T c π as observed variables. The likelihood funcion for { d } /2 f ˆ ˆ d, (2 ) ' exp ( ' ' )'( ' ) ( ' ' ), x H P H Ω = π d A x H H P H d A x H ξ ξ 2 for =,2,..., T. = is: Thus, he sample log likelihood is T = log fd x, Ω numerically wih respec o he srucural parameers of he model., and i can hen be maximized 40

41 Daa Consumpion corresponds o privae consumpion from Spanish Naional Accouns and inflaion is he annual growh rae of CPI. The real oil price is consruced from he raio beween nominal oil prices and he GDP deflaor and normalized o uniy. The annual inernaional ineres rae is assumed o be consan and equal o 4%. The daa sample is 97:-2007:2. 4

42 Table 2. The conribuion (%) of produciviy shocks, moneary shocks and oil price shocks o flucuaions in oupu (y), inflaion (π ), hours worked (h) and real money holdings (m) Periods Inf oupu inflaion hours worked real money holdings 97:-2007:2 (97:-999:4) Produciviy Moneary (47.55) (26.96) (59.47) (9.83) (64.54) (5.60) (67.76) (4.6) (72.20) (3.0) (77.97) (2.7) (82.27) (.73) Oil Price (25.49) 27.8 (30.7) (29.85) (28.08) (24.79) 2.06 (9.86) 9.94 (6.0) 97:-2007:2 (97:-999:4) Oil Produciviy Moneary Price Periods Periods (0.67) (97.9) (.43) (0.75) (97.8) (.44) (0.79) (97.77) (.44) (0.82) (97.74) (.44) (0.87) (97.69) (.44) (0.95) (97.62) (.43) 40 Inf (.02) (97.54) (.43) Inf 97:-2007:2 (97:-999:4) 97:-2007:2 Oil Produciviy Moneary Price (59.24) (4.60) (36.6) (64.08) (.57) (34.34) (67.55) (0.90) (3.55) (70.9) (0.67) (29.4) (74.4) (0.48) (25.38) (79.48) (0.35) (20.8) (83.50) (0.27) (6.22) Periods Produciviy Moneary (2.87) (92.83) (.3) (72.06) (8.38) (56.7) (23.0) (48.9) (29.39) (4.23) (37.64) (34.65) Inf (44.49) (30.66) Oil Price 5.6 (4.30) 6.62 (6.8) 2.92 (24.9) (27.99) (29.38) (27.7) 22. (24.85) 42

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45 Table. Parameers. 97:-2007:2 97:-999:4 PREFERENCES β (0.0056) (0.0029) θ (calibraed parameer) σ (0.0035) (0.0004) ψ (calibraed parameer) TECHNOLOGY ε α α 2 RIGIDITIES.348 (0.095) (0.0689) (0.042).3585 (0.004) (0.0023) 0.36 (0.004) η (0.0000) φ (0.003) TECHNOLOGICAL SHOCK (0.0000) (0.006) ρ z σ z (0.0007) (0.002) (0.0006) (0.0004) 45

46 OIL PRICES (esimaed AR() process) e p ϕ e p (0.0269) σ e p (0.0033) TAYLOR RULE ρ i ρ Π ρ y σ i (0.0020) (0.053) (0.0006) 0.09 (0.006) (0.0293) 0.88 (0.0044) (0.0000) (0.0005) (0.0000) (0.0009) Log Likelihood Correlaion(y, yˆ )

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