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Overnight, the demand changed to small cars. Casey said the industry paid good wages, built what it wanted, didn't worry much about quality. It was complacent. The oil crisis brought quality problems and gas mileage to the forefront, Casey said. People who made the switch to Japanese cars found they were better built than American cars. American auto companies were in trouble.
They would have to shape up or disappear. In , before the energy crisis, subcompact cars made up only Overall new-car sales for the Big 4 plunged Chrysler, worst off of all, nearly died from its wounds. Hemorrhaging red ink, Chrysler had to turn to the federal government for help. The G. The early s was also a period of labor strife: G. But the context was different, and so were the economic implications. That was an era of rapid inflation, and labor unions were at the height of their power — two phenomena that were connected.
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Autoworkers and other powerful unions in that era fueled higher inflation economywide by demanding — and getting — ever-escalating pay increases, which fed into consumer prices. The autoworkers striking today are essentially trying to claw back some of the compensation they have lost over a brutal decade.
Average wages in the motor vehicle industry have fallen 2 percent since , according to the Center for Automotive Research, amid an 18 percent rise in consumer prices over the same period. Similarly, the upside-down world of low inflation affects the unusual politics around the Federal Reserve. President Nixon and his aides blatantly pressured Arthur Burns of the Federal Reserve to increase the money supply, despite rising inflation, viewing a strong economy as the key to Mr. They used both public and private pressure, and some underhanded moves like leaking false information that Mr.
Burns had sought a large pay raise. President Trump has taken to assailing the Fed chair, Jerome Powell, by tweet and calling for steep interest rate cuts. Powell is an enemy of the United States. In Switzerland, purchasing power remains constant in the long run. In addition, there is a considerable decline of investment in the euro area and Switzerland that also only starts accelerating with a delay.
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This pattern of consumption and investment responses indicates that another effect is at play. The inflationary effects caused by the oil shock, and the existence of harmful second-round effects in these two economies, result in a monetary tightening as captured by the significant estimated interest rate increase in both economies. This monetary policy effect is likely to be responsible for the fall in economic activity and can also explain the different speed of pass-through to real GDP.
Given lags in the monetary transmission mechanism, consumption, investment and real GDP only start to fall with a delay. The much stronger decline in investment is a feature that confirms the presence of monetary policy effects. The lack of an interest rate reaction in Japan, combined with the absence of a loss in purchasing power for consumers, results in an insignificant reaction of private consumption and investment.
Hence, demand effects in Japan are only reflected in a significant fall of the price-wage ratio reported in Section 3. There is reason to believe that the economic effects of oil shocks have changed fundamentally over time. The two large oil price shocks of the s were associated with higher inflation and lower economic growth. In contrast, the latest, sustained run-up in oil prices appears to have had a relatively modest impact on real economic activity and consumer prices. Instabilities over time in the relationship between oil and the macroeconomy are widely documented in the literature.
For instance, institutional transformations such as the transition from a regime of administered oil prices to direct trading in the spot market, and the collapse of the OPEC cartel in late were accompanied by a dramatic rise in oil price volatility. Lee et al and Ferderer make the case that this increased oil market volatility led to the breakdown of the relationship between oil prices and economic activity. Baumeister and Peersman , however, have shown that such intertemporal comparisons are seriously distorted since the global oil market has been characterised by further structural change since the mid s.
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In what follows, we further document this structural change and the consequences for our analysis. In order to explore how the interaction between oil shocks and the macroeconomy has evolved over time, Baumeister and Peersman estimate a multivariate Bayesian VAR that features time-varying coefficients and stochastic volatilities in the innovation processes for the period Q1—Q1. The time-varying coefficients are meant to capture gradual transition in the propagation mechanism of oil shocks, while the stochastic volatility component models changes in the magnitude of structural shocks and their immediate impact.
Figure 7 shows the estimated slope of the oil demand curve at each point in time with 16th and 84th percentiles of the posterior distribution. This steepening of the oil demand curve seriously complicates comparisons of the dynamic effects of oil supply disturbances over time. For instance, a comparison that is based on a similar change in crude oil prices for example, a 10 per cent rise implicitly assumes a constant price elasticity of oil demand over time, which is obviously rejected by the data.
Consequently, this experiment compares the impact of a totally different underlying oil supply shock. Figure B2 illustrates that the shift of the oil supply curve needed to generate a similar oil price increase clearly differs for a steep, as opposed to a flat, oil demand curve. For exactly the same reason, measuring an exogenous oil supply shock as a similar shift in world oil production over time for example, a drop in production of 1 per cent is a biased experiment since the resulting oil price increase will be very different. Even so, the magnitude of a representative oil supply disturbance could have changed over time, which could also influence the outcome.
Whether the size of a typical oil supply shock has changed unfortunately cannot be determined. Baumeister and Peersman show that the short-run oil supply curve became highly inelastic over time. Accordingly, comparisons of normalised demand shocks are biased since a constant slope of the oil supply curve is assumed. In the next section, we demonstrate the consequences of this structural change for drawing conclusions about time variation.
The results of Baumeister and Peersman presented in Figure 7 clearly show a break in the slope of the oil demand curve in the first quarter of The latter period corresponds to the model reported in the previous sections. The top row of Figure B3 contains the impulse responses of world oil production and the oil price following a typical one standard deviation oil supply shock.
An unfavourable oil supply shock in the s is characterised by a much smaller fall in oil production in combination with a larger increase in the price of crude oil relative to the s. The corresponding estimated slope of the oil demand curve, which is depicted in the top-right panel, confirms the considerable steepening over time. The consequences of this structural change in the crude oil market for US real GDP and consumer prices is shown in the second and third rows of Figure B3.
Consider, for instance, the effect of an oil supply shock which raises the price of crude oil by 10 per cent. Such a shock has a more muted impact on economic activity and inflation in more recent times compared to the s.
This finding complies with the general perception and the empirical evidence on time-varying effects of oil price shocks discussed above. This experiment, however, is biased since it implicitly assumes a constant slope of the oil demand curve across both sample periods, which is clearly not the case. More specifically, a 10 per cent rise in oil prices corresponds to an oil production shortfall of less than 1 per cent in the more recent sample period. To elicit the same oil price movement in the s, a decline in oil supply of around 3 per cent was required. For instance, the impact on revenues for oil-exporting countries and corresponding income-recycling effects via trade depend on both the amount of oil production and its price.
Alternatively, we could consider a 1 per cent reduction in oil production. Oil supply shocks have often been associated with physical disruptions in the production of crude oil due to deliberate decisions by OPEC aimed at imposing a certain price level, or as a result of the destruction of oil facilities in the wake of military conflicts.
Figure B3 shows that the accumulated loss in US real GDP growth is about twice as large in the s compared to earlier times and the response of consumer prices is much more pronounced in the more recent period. This finding is not surprising, since a similar reduction in oil quantities triggers a substantially larger oil price increase in the recent period due to the much lower elasticity of the oil demand curve. More specifically, oil prices are estimated to have increased by Normalising on the quantity variable to make intertemporal comparisons is therefore also problematic, because a typical one standard deviation shift of oil supply in the s is characterised by a change in world oil production that is only one-fifth of an average shift in the s.
Given the inability to distinguish volatility and the immediate impact of a structural shock in an SVAR, it is not possible to identify whether these smaller variations in oil production are just the result of a steeper oil demand curve, or also the consequence of smaller shifts in the underlying supply curve over time. When we consider the dynamic effects of a typical one standard deviation oil supply shock, the middle and lower right-hand-side panels of Figure B3 show that the impact on US macroeconomic aggregates is rather similar across the two sample periods.
This is consistent with the evidence provided in Baumeister and Peersman Alternative factors, such as loose monetary policy, were much more important explanators of excessive inflation experienced during this period, in line with the propositions made by Barsky and Kilian Oil supply shocks contributed in varying degrees to the recessions of —, the early s and s, but other shocks were also at play. Unfavourable oil supply disturbances substantially dampened real activity around , which made the ongoing boom more subdued.
As a consequence, the timing of oil shocks could have shaped the general perception that adverse oil supply shocks were more detrimental to the economy in the s compared to more recent times. Since economic consequences are very different for demand-side induced oil shocks, the fact that they currently dominate oil price movements could have altered the way that their effects are perceived. The previous section documented that comparisons of the dynamic effects of oil supply shocks over time are problematic because of the problem of how to normalise the shocks.
However, Peersman and Van Robays a show that the cross-country dimension of the analysis can be exploited to learn more about time variation while circumventing this normalisation problem.
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Table B2 reports several indicators of the average shares of oil and energy for the economies in our sample for — and — While all economies experience a noticeable fall in total energy intensity and an improvement in net oil and energy dependence, the cross-country differences are substantial. Canada and the United Kingdom even switched from being oil importers in the s to net exporters more recently. Even within the group of oil and energy-importing economies, the changes over time vary across economies. Unlike the euro area and Japan which significantly lowered their reliance on oil imports, Switzerland and the United States hardly improved their oil dependence.
To evaluate whether a change in the importance of oil and other forms of energy in the economy is important in explaining time variation, we examine the impact of an oil supply shock, normalised to a 10 per cent long-run oil price rise, for all economies for the periods — and — Figure B4. Normalising on oil prices, the ultimate output consequences have indeed reduced over time for all economies, in line with the evidence for the United States reported above.
However, the degree of improvement is very different across economies.