Accounting for the declining economic effects of oil price shocks

Many studies have concluded that the effects of oil price shocks have diminished since the mid-1980s. This paper revisits the evidence in Blanchard and Gall (2010). I show that the apparent instability in the oil pricemacroeconomy relationship they find can be accounted for by the endogeneity of oil price changes and the lower energy share in consumption in recent decades. When these two factors are taken into account, the effects of oil price shocks on real economic activity appear to be stable over time. Nevertheless, the impact of oil prices on inflation has noticeably weakened. (c) 2020 Elsevier B.V. All rights reserved.