Disentangling The Effects of Oil Shocks: The Role of Rigidities and Monetary Policy

Using a new Keynesian, stochastic, dynamic model of a small open monetary economy that imports oil and applying it to the Spanish economy, this paper addresses the question of why the effects of oil shocks from the mid-1980's on output and inflation were smaller. We depart from the previous literature on this topic by simulating a theoretical model whose parameters are estimated using Kalman Filter techniques. The paper is particularly appealing to study the effects of high energy prices, which would be associated to climate change policies, and to the feedback effects of those policies on the economy. The results of the paper support the hypothesis of smaller macroeconomic effects of oil shocks from the mid-1980's. The results emerge from the different features of the economy: both labor market rigidities and the oil share have decreased over time and the monetary policy has changed in that it is more focused on controlling inflation.