Energy prices and business cycles: Lessons from a simulated small open economy. Torsten Schmidt, RWI Essen * Tobias Zimmermann, RWI Essen *

Transcription

1 Energy prices and business cycles: Lessons from a simulaed small open economy model Torsen Schmid, RWI Essen * Tobias Zimmermann, RWI Essen * Preliminary Version, Ocober 2008 Absrac Despie energy price hikes in recen years growh raes urned ou o be high in mos indusrialised counries. Given he well-known adverse effecs of energy price shocks in he 970s and 980s, his may be puzzling. This sudy invesigaes if a reducion in he energy cos share or differen sources of energy price hikes can explain his puzzle. By adding an exogenous wo variable VAR o a new open economy model for Germany, i is considered ha energy prices and he global economy are independen from domesic variables bu influence each oher. We show ha calibraing he energy cos share o daa averages is no sensible. Insead long run flucuaions in imporan observable srucural parameers and VAR coefficiens change he calibraion of he model each period. By shocking he model by an increase in energy prices (global oupu), he effecs of supply-driven (demand-driven) energy price increase are simulaed. The resuls poin ou ha he effecs of recen energy price hikes have only been differen, because hey were demand-driven. Therefore, supply-driven energy price increases are sill an imporan source of business cycle flucuaions. JEL Classificaion: E3, E32, F4 Keywords: Energy prices, new Keynesian open economy model * Hohenzollernsraße -3, 428 Essen. schmid@rwi-essen.de. * Hohenzollernsraße -3, 428 Essen. obias.zimmermann@rwi-essen.de.

2 2. Inroducion Energy prices have risen dramaically since 2004 while economic growh remains relaively high in mos energy imporing counries. This suggess ha he curren effecs of energy price hikes are differen from he sevenies and early eighies. In general, here are wo caegories of explanaions. Firs, he difference can be caused by a change in he economic srucure, in paricular a reducion of he energy cos share. In his case, he effecs of supply-driven energy price shocks were reduced permanenly. Second, recen energy price increases are likely o be demand-driven o a large exen, i.e. riggered by a soaring world economy. Thus, he favourable sance of he world economy migh have compensaed he adverse effecs of more cosly energy. By simulaing a new open economy (NOE) model for he German economy, we analyse hese wo explanaions more elaboraely. In he model he size of he energy cos share deermines he srengh of adverse supply effecs of energy price hikes. Due o he imporance of his variable for our simulaions we exrac he underlying rend of his and oher imporan variables and use hem o change he calibraion of he model for each period. Moreover, energy price and global economy shocks are supposed o be relaed. We accoun for his co-movemen by adding an wo variable VAR for energy prices and global GDP o he NOE model. Changes in he persisency and he relaion beween shocks are capured by varying he relevan parameers each period according o 40 period rolling window esimaes. Two differen ypes of energy price shocks are performed each period: supplydriven energy price shocks simulaed by an innovaion o energy prices, and demand-driven energy price movemens simulaed by an innovaion o global oupu. The resuls of our simulaions sugges ha, energy prices are sill an imporan source for business cycles in Germany. Excep for he nineies, energy price hikes sill have subsanial negaive effecs if hey were supply-driven; hence, he source of he shock maers a lo. Then, only he simulaed responses o a global economy shock resemble he evoluion of he energy price and imporan domesic variables during he recen energy price shock episode. Consequenly, he effecs of recen energy price hikes have only been moderae, because hey were demand-driven o a large exen. Our resuls conribue o he ongoing discussion wheher he effecs of oil price shocks have changed since he early sevenies. In favour of non-fundamenal changes Hamilon (996) sresses ha he effecs of energy price increases are sill he same as in he sevenies if one concenraes on srong oil price increases. In line wih our approach, Kilian (2006) claims ha he energy price shocks in he

3 3 sevenies and early eighies were exogenous supply shocks caused by poliical evens while he recen energy price hike was caused by excess demand, in paricular relaed o increasing economic aciviy in ransiion economies like China and India. In conras, oher auhors argue ha he energy inensiy of producion has been reduced by indusrial counries since he sevenies (e.g. Blanchard, Gali 2007; Sanchez 2008). Wih he experience of he energy price shocks, firms increased heir energy efficiency of producion. Moreover, a rend owards more flexible real wages lead o smaller responses of real oupu and inflaion afer an energy price shock. Finally, sagflaion in he U.S. during he sevenies and early eighies was mainly caused by moneary policy (Barsky, Kilian 200; Bernake, Gerler, Wason 996). In his case, he poliical evens in he Middle Eas only amplified he economic downurn. The ouline of he paper is as follows: in he nex secion we describe some sylized facs concerning imporan economic variables. In secion hree we describe he model, he calibraion and he soluion mehodology. Secion four presens he simulaion resuls. Secion five summarizes and concludes. 2. Basic facs In his secion we idenify imporan energy price shocks and characerise he evoluion of imporan macroeconomic variables during hese episodes. I is shown ha real variables evolve quie differenly, whereas he magniudes of he price increases are quie similar. Figure visualises he developmens of nominal and real prices of impored energy sources. The price series is he price index of impored energy provided by he Federal Saisical Office. Since 970 here are four big jumps in real energy prices. The firs jump in he energy price index occurred in 974 from 40 o 40. The second increase from 80 o 60 sared in 979. The increase of energy prices afer 999, also proceeded in wo seps. In he firs sep energy prices jumped from 40 o 00 and moderaed o 90 in The second increase sared in 2004 and reached in 2007 he level of 98.

4 4 Figure. Energy shock episodes Real price of impored energy Nominal price of impored energy Noes: To ge he real series he nominal price index of impored energy (2000 = 00) is deflaed by he GDP-deflaor. Source: Federal Saisical Office. The movemens of he price for impored energy sources during he four previously defined episodes are characerized in able. The las wo columns show he change of he nominal and he real energy price index, respecively. During he firs energy shock episode he real energy price increased by more han 30% and nearly doubled again beween 978:Q4 and 98:Q3. Though he recen shock episodes show sligh differences according o hese numbers, i is unlikely ha hese differences are sufficien o explain he differen effecs on energy imporing economies. Table. Energy shock episodes run-up period change in % (nominal) change in % (real) Shock 973:Q3-974:Q 3 32 Shock 2 978:Q4-98:Q Shock 3 999:Q-2000:Q Shock :Q-2006:Q3 0 48

5 Table 2 repors he developmen of imporan macroeconomic variables during he episodes of subsanial energy price increases. Here, growh raes are added eigh quarers subsequenly o he quarer in which he energy price sars o rise. Then he cumulaed growh raes of he previous eigh quarers are deduced. Inflaion and ineres raes are averaged over hese periods. I is shown ha he firs wo energy price shock episodes were accompanied by a subsanial loss in GDP, while in he hird and fourh episode here was a gain insead. Excep for he firs episode, when here was a loss, expors increased faser in periods of energy price shocks. However, he gains in expors were subsanially higher in he recen wo episodes han previously. There is also a sligh change in he effecs on inflaion. During he firs wo energy price shocks inflaion increased abou 2.6 percenage poins, while he inflaion rae has increased moderaely (by.4 percenage poins) during he recen energy price shocks. I is herefore no surprising ha he ineres rae increased o a lesser exen during he more recen energy price shocks. However, able 2 shows ha moneary policy has even lowered ineres raes during he firs energy shock episode and was all he more resricive aferwards. The reacion wih regard o he recen shocks seems o be more consisen. Table 2: Changes in seleced macroeconomic variables during energy shock episodes Shock Shock 2 Shock 3 Shock 4 GDP Expors Inflaion Ineres rae Model simulaions To invesigae he reasons why similar increases in energy prices have quie differen effecs on he German economy, a new open economy- (NOE-) model in syle of McCallum and Nelson (999) is used. Like Kamps and Pierdzioch (2002) he model considers ha energy is no only used for producive purposes, bu is also consumed. According o he model, Germany is reaed as a small open economy, i.e. he sance of he global economy and he real price of impored energy sources are modelled as exogenous shocks. By using a srucural model, he effecs of a lower energy cos share can be idenified. However, afer presening he model seup, we show ha he energy cos share in Germany exhibis long-run flucuaions, including a rend reversal, which are commonly no classified as

6 6 cyclical. The same is rue for he relaion beween energy prices and world GDP growh. To capure hese rends, a ime-varying calibraion of he models is proposed. According o his concep, he effecs of boh shocks have o be calculaed separaely for each period. 3. Model seup In his secion we describe he NOE-model. Since he derivaion of he model is well documened in he lieraure, only a brief descripion of he model is given. In he following lower case leers denoe logarihms of he corresponding upper-case variables. Aggregae supply In he model energy is uilized o produce domesic oupu according o a CESproducion funcion: υ Y Y ( )( ) N E υ υ = α α +. Y N and E represen labour inpu or energy inpu, respecively. I is assumed ha under price flexibiliy labour inpu equals one for all. Therefore, energy inpu under price flexibiliy, e y, is deermined by poenial oupu, e prices, p : y, and energy y e e = y p. υ Oupu under price flexibiliy is: SS υ ( α )( ) y = e e. Y y The parameer e SS Y represens he energy cos share of producion in he seady y sae. By combining boh relaions, e can be eliminaed. y = SS υ ( α )( ey ) SS ( υ) ( α)( ey ) υ e p ()

7 7 Oupu under flexible prices, y, negaively depends on real energy prices measured in domesic currency. Since he model absracs from all impors besides energy and he real energy price is direcly measured in Euro, he real exchange rae does no appear explicily in equaion (). Because of cerain monopoly power each firm reas he price of is good as a choice variable while he aggregae and foreign price level are aken as given. Afer seing he profi-maximizing price each firm produces whaever quaniy of oupu is demanded. I is assumed ha firms behave according o a price adjusmen mechanism similar o he one inroduced in Fuhrer and Moore (99). This approach raionalizes a reasonable degree of ineria in inflaion dynamics. More precisely, i claims ha inflaion, measured as he change of he price index of domesically produced goods, is a funcion of he oupu gap, y%, and of he weighed average of lagged and expeced inflaion ( + ) Δ p c = 0. Δ p c +Δ p c +Ψ% y. (2) Here, Ψ is a parameer depending on he degree of price sickiness in he economy. The sickier prices, he flaer he Phillips curve. The oupu gap y% = y y (3) is characerized as he difference beween acual oupu, y, and he amoun of producion ha would prevail under flexible prices. Aggregae demand and moneary policy In his model energy prices affec oal consumpion, cx in wo ways since in case of an energy price hike boh, he producion of domesically produced goods, and he consumpion of energy become more expensive. Opimal consumpion is derived from households, maximizing heir expeced lifeime uiliy wih respec o oal consumpion, real money balances, and domesic and foreign bonds. Preferences include habi formaion, using a special case of he funcional form proposed by Carrol e al. (99). By combining he firs order condiions wih regard o consumpion and bonds, he expecaional difference equaion for he change in consumpion ( Δcx ) wih respec o expeced fuure consumpion, expeced price cx R is: level ( ) p +, and he nominal ineres rae ( ) cx β ge cx+ 2 g2e cx+ g3e p+ g cx g3r Δ + Δ + Δ = Δ + (4)

8 8 where β is a discoun facor, and g o g 3 depend on β, risk aversion and habi persisence. Toal consumpion, cx, is he sum of domesic consumpion, c, and impored energy, which leads o he following linear approximaed ideniies for he consumer price level, p cx : ( α) p = αp + p () cx c e where α sands for he average share of energy impors in oal consumpion, c e p is he price level for domesic consumpion and p he price level for impored energy. The following relaion deermines he demand for domesically produced consumpion in dependence of he relaive domesic price level c cx ( ) c = cx p p. (6) Moneary policy ses he nominal ineres rae, R, according o a Taylor rule, which enails a reasonable degree of ineres rae smoohing. ( ) cx cx ( ) R = μ0 + μ3 Δ p + μ Δp π + μ2y% + μ3r (7) Here, π represens he inflaion objecive of he cenral bank. Open economy elemens and goods marke equilibrium The world demand shock eners he model hrough he expor equaion: ex = by + ηq. (8) * * Expors, ex, posiively depend on global oupu, y, and he real exchange rae, q. b and η are he income and exchange rae elasiciy. The real exchange is he sum of he nominal exchange rae, s, and he difference beween foreign and domesic price levels: The exac definiions and calibraed values of all parameers of he model and can be found in he appendix.

9 9 * cx cx q = s + p p. (9) Addiionally, he uncovered ineres pariy is assumed o hold: R = R + E Δ s + κ. (0) * + * Here, R and R represen he domesic and foreign nominal ineres raes which are defined as he sum of real ineres raes, r, and expeced inflaion * * * ( R = r + EΔ p + and R = r + EΔ p + ). The variable s sands for he nominal exchange rae. In his model he foreign variables are reaed as exogenous. To close he model, we follow Schmi-Grohe and Uribe (2003) by modelling he risk * premium, b κ, as a funcion of he raio of he nominal value of foreign bonds ( ) and domesic nominal oupu ( y ) : ( s b * p Y y ) κ = ϕ +. () Since capial accumulaion is ignored, oal domesic producion is spen solely for domesic consumpion and expors. SS ( ) y = ex c + ex ex. (2) The parameer SS SS ex denoes he expor share in he seady sae. Equaions () (2) esablish a sysem of 2 difference equaions in he endogenous variables ex c cx, c, cx, κ, p, p, q, R, s, y, y%, y. In addiion we rea he energy price and all foreign variables as exogenous Time varying calibraion In his secion he calibraion of he model is discussed. The mos imporan measure o assess he supply side effecs of energy price hikes is he energy cos share, e, (figure 2). Several papers (e.g. Blanchard, Gali 2007; Schmid, SS Y Zimmermann 200, 2007; Sanchez 2008) disinguish wo sub-periods o invesigae he effecs of price shocks in more and less energy inensive imes. Obviously, he calibraion of a low energy inensive era from he end of he eighies up o now seems no o be suiable any more. Even if he amoun of energy (in physical unis) in relaion o GDP has remained lower han in he 70s and 80s, he ongo-

10 0 ing upward rend in energy prices since 2002 has pushed he energy cos share near o is previous peak in 98. Figure 2. Energy usage and energy impors in proporion o GDP % % 4% 3% % % 0% Energy usage (righ axis) Energy impors (lef axis) Noes: To calculae energy usage in proporion o GDP, nominal energy impors are deflaed by he price index for impored energy and divided by real GDP. Since he level of his measure is arbirary 970 is se o 00. Source: Federal Saisical Office. Therefore, a calibraion on he basis of sample averages seems no o be convenien o capure cos rends adequaely. Insead, he HP-filer is used o idenify rends in he energy cos share which changes he calibraion of he model for each quarer of our sample. Thus, long-run flucuaions which are commonly no classified as cyclical are employed for calibraion purposes while he remaining flucuaions of he energy prices are inerpreed as shocks. 2 The idenified cos rend sug- 2 To calculae he share of impored energy in oal consumpion, α, we assume ha 70 percen of he impored energy is spen for producion while 30 percen are consumed by privae households. This

11 gess ha he cos burden for he German economy, since 200 is nearly as large as during he eighies. The same filer is applied o calibrae he expor share, SS ex, which is an indicaor of openness and herefore crucially deermines he response of he domesic economy o world GDP shocks. This parameer shows an upward rend ha has become seeper afer As menioned above energy prices and he global economic aciviy are assumed o be no influenced by he German economy bu linked. To capure hese ineracions a VAR() which conains he real energy prices and a measure of global oupu is esimaed. E E IM IM IM p E p ε =Γ * * + * Y y y ε (8) Boh ime series are HP-filered before esimaion. Thereby, long-run rends in energy prices are already considered by calibraion, he remaining flucuaions are inerpreed as shocks. Moreover, i is supposed ha he relaionship beween he exogenous variables may have changed. By esimaing a rolling window scheme of 40 quarers over he period from 970:Q o 2007:Q4, rends in he relaionship beween, and he persisency of exogenous shocks are capured. The oher parameers of he model are largely se o he same values as in he sudies of McCallum and Nelson (999) and Kamps and Pierdzioch (2002). 4 However, by seing he parameer υ close o zero a very simple approach is chosen concerning producion. Thus, he producion funcion can be inerpreed as Cobb Douglas and α sands for he non-energy cos share in domesic producion. The supply side of our economy resembles he approach ha has been aken in Kim and Loungani (99) as well as Schmid and Zimmermann (2007). Concerning preferences we also differ from he benchmark calibraion in McCallum and Nelson (999) by assigning σ he convenional value of. The coefficien of he risk premium equaion, ϕ, is se o (Ambler e al. 2004). Well esablished esimaes of he coefficiens of a Taylor rule for Germany can be found in he paper of Clarida e al. (998). The poin esimaes for he parameers disribuion is a very rough esimae based on informaion from he Arbeisgemeinschaf Energiebilanzen. 3 SS Noe ha he corresponding parameer c is no calculaed on he basis of he daa. Since he model absracs from saving and capial accumulaion all oupu beside expors is spen for consumpion purposes. c SS SS is herefore simply ex. 4 A able which enails all parameer values can be found in he appendix.

12 2 μ and μ2 are 0.3 and 0.2, respecively. Faus e al. (200) find similar values for hese coefficiens, albei for slighly diverging periods. All of he menioned papers sugges a disincive endency o smooh ineres raes over ime. For insance, according o Clarida e al. (998), he poin esimae of he relevan coefficien is equal o Simulaion Resuls In his secion impulse response funcions, showing he reacion of endogenous variables o energy price and global economy shocks, are presened. Due o he ime varying calibraion proposed above, he responses o shocks are calculaed a each poin in ime. In he firs simulaion, only long-run movemens of he energy cos and he expor share are applied whereas shocks remain unchanged. In his case, shocks are assumed o be independen AR()-process, ha are esimaed over he whole sample. The effecs of energy price shocks on he German economy are ploed in figure 3. The period a which he iniial impulse of a one percen increase in energy prices his he German economy is depiced on he x-axis. The z-axis represens he number of periods afer he iniial shock impulse. The verical axis shows he amoun of reacion. Impulse response funcions are calculaed from 97:Q o 2006:Q4. I is demonsraed ha supply side effecs of energy price shocks were negligible only in he nineies. A he end of he simulaion sample (2006:Q4), he reacion of GDP amouns o over 70% of he maximum effec which is compued for 982. The same is also rue for expors, he price level, and he reacion of he moneary auhoriy. Noe ha he final simulaion sars a he end of 2006 and herefore shows wha will happen, when energy prices sar o rise from he level of 2006.To answer he quesion wheher energy price shocks have changed i is suggesive o compare he effecs a he beginning of he defined energy shock episodes. The magniude of he reacion in 2004:Q is roughly /3 larger han in 973:Q and /3 lower han in 980:Q. The curren rend in he energy cos share herefore suggess ha he recen energy price shock should have had effecs similar o earlier shock episodes. The German economy has no reduced he energy inensiy of producion or he energy usage for consumpion purposes sufficienly o preven a rend reversal of he energy cos share. Consequenly, energy imporing counries have no become immune o supply side-driven energy price hikes.

13 3 Figure 3. Impulse response funcions of he NOE-model o a one uni energy price shock, consan shock coefficiens x 0-3 Oupu x 0-3 Expors Consumer price level x 0-3 Ineres rae So far we have shown ha he energy cos share is no able o explain why he effecs of energy price shocks where severe in he sevenies and early eighies, bu have only negligible effecs or are even accompanied wih excepional high growh raes nowadays. For a small expor-oriened counry like Germany he source of he shock maers a lo. On he one hand, he negaive effecs of higher energy prices can be compensaed when hey are accompanied or even riggered by a soaring world economy. On he oher hand, he negaive effecs of higher energy prices can be aggravaed when hey are accompanied by a global recession. In he following simulaions he energy prices and global oupu evolve independenly from he German economy, bu are allowed be inerrelaed. Trends in he behaviour of he exogenous shocks are employed in a wo variable VAR. Since he coefficiens are esimaed in a 40 periods rolling window scheme, he firs (laes) impulse response funcions are available for 97: (2002:Q4). Thus, he simulaions can no ulimaely answer he quesion wha will happen if energy prices rise again in he curren siuaion. However, simulaing shocks a he beginning of 2003 should reasonably explain he evoluion of macroeconomic variables during he laes run-up period (2004:Q-2006:Q3).

14 4 The seup offers wo differen explanaions for energy price hikes. Firsly, as before an energy price increase is modelled as an exogenous iniial innovaion. However, conrary o he former case his shock may be aggravaed by global economic downswings. Secondly, energy prices are riggered by global oupu. This varian resembles a demand-driven energy price increase. We presen boh simulaions, in he following. Since he effecs on he German economy are quie differen, we can decide which of he wo varians yields a plausible explanaion for differen shock episodes. Figure 4 shows wha happens o imporan macroeconomic variables subsequen o a one uni energy price hike when all ime varying elemens are included. In conras o he former simulaions differences in he impulse funcions are no only caused by rends in srucural parameer bu also by a changing persisency of energy prices hemselves and changing effecs on he global economy. A firs, i becomes eviden ha he persisency of he energy price iself was excepionally large in he beginning of he 80s. Then, a he same ime he esimaed effecs on he world economy increased. Thus, he adverse supply effecs on he German oupu and expors were relaively persisen and heavily aggravaed by a decrease in demand from abroad. This can be seen by comparing he magniude of he responses o he ones which are depiced in figure 3. In consequence of he high energy price persisency during his ime, he price level effecs of energy price shocks are inimiable large from he beginning o he middle of he eighies. These simulaions are herefore useful o undersand he firs energy shock episodes, because hey reproduce no only he very large negaive impac on domesic and worldwide aggregaes, bu also a harsh moneary reacion wihou referring o credibiliy problems. Key facors are he persisency of he energy price iself and is srong negaive impac on he world economy. The las menioned facor heavily aggravaes he pure energy price shock for expor inensive counries.

15 Figure 4. Impulse response funcions of he NOE-model o a one uni energy price shock, ime-varying shock coefficiens Energy price World economic aciviy Oupu Expors Consumer price level x 0-3 Ineres rae

16 6 Even if he effecs of energy prices where srongly aggravaed in he sevenies and early eighies bu no in recen run-up periods, supply-driven energy price shocks in any case cause negaive effecs on real and posiive effecs on nominal domesic variables. Thus, hese simulaions are less appropriae o reproduce he very recen facs, which sugges ha energy price shocks have no subsanial effecs or are even accompanied by unusual high growh raes and moderae inflaionary pressure. In a final simulaion exercise, he model is shocked by he same innovaion o global oupu in each period. I is shown ha hese simulaions provide a reasonable explanaion of he sylized facs of he recen energy price episodes. Especially, afer he end-nineies, shocks o global oupu are accompanied by increasing energy prices. Noe ha he magniude of he innovaions is chosen o cause approximaely a one uni increase in energy prices in recen shock episodes. Moreover, domesic oupu and expors increase and he effecs on he consumer price level are moderae, so ha a minor reacion of he moneary auhoriy succeeds. The final simulaion, saring in 2002, maches exacly wha can be observed in Germany (and in oher small energy imporing counries) from his poin in ime on up o now: a booming world economy, rapidly increasing energy prices, an increase in domesic oupu and expors, moderae inflaionary pressure, and a moderae reacion of he cenral bank. The simulaion of he end-eighies and nineies sugges ha economic booms and energy prices exhibi a weak or even negaive relaionship, i.e. energy prices were no demand driven during his period. Surprisingly, he simulaions, which are conduced for he ime before 980, show ha according o he model he demand shock explanaion is no compleely implausible for previous energy shock episodes. Conrary o recen shock episodes, he negaive effecs of higher energy prices which succeed economic booms srongly overcompensae he weak posiive iniial effecs on expors and oupu. As observed in his period he effecs on hese variables are herefore ulimaely negaive. However, here is srong evidence ha energy supply was shorened previous o he earlier shock episodes. We conclude ha he supply shock explanaion plays a leas a dominan role in he firs energy shock episodes. Noe, ha ineres raes would probably be higher, if recen financial markes urbulences have no pushed cenral banks o keep ineres raes consan.

17 7 Figure. Impulse response funcions of he NOE-model o a global economy shock, ime-varying shock coefficiens Energy price World economic aciviy Oupu Expors Consumer price level x 0-3 Ineres rae

18 8 4. Conclusions This paper conribues o he ongoing debae on he changing effecs of energy price shocks. We illusrae ha during he recen energy price shock episodes he inflaion rae and he ineres rae increased moderaely compared o he sevenies and early eighies, while GDP and expors showed unalered or even higher growh raes following recen energy shock episodes. We show ha a permanen reducion of he energy cos share can no be a source for he differen effecs of energy price hikes on he German economy. While he energy cos share is an imporan facor for he effecs of energy price shocks, i increased subsanially since he lae nineies. This ongoing upward rend in he energy cos share suggess ha energy imporing counries like Germany have become again quie vulnerable o energy price shocks in recen imes. In addiion, due o his upward rend a calibraion of he energy cos share o sample averages is no useful o asses why he adverse supply effecs of energy price migh change over ime. Insead we propose o indenify rends in observable srucural parameers which change he calibraion our model each period. Using a ime varying calibraion gives us also he opporuniy o consider he changing relaion beween energy prices and he global economy by esimaing a rolling window scheme. Simulaions wih an NOE-model sugges ha he source of an energy price shock plays he major role from he perspecive of a small open economy. Supply-driven energy price shocks can explain he sylized facs of he firs shock episodes very well. Hereby, he succeeding worldwide economic downswing heavily aggravaed he pure supply side effecs. Moreover, since oil price increases were excepionally persisen, even he harsh moneary reacion in he early eighies can be explained wihou referring o credibiliy problems or oher special facors. Surprisingly, also he demand shock view is no compleely implausible as an explanaion for he earlier shock episodes. During hese imes he only weak posiive effecs of shocks o global producion on domesic oupu were srongly overcompensaed by he srong negaive effecs of succeeding energy price increases. On he conrary, he supply shock simulaion does no yield a convenien explanaion for recen energy price shocks and heir consequences while a demand-driven energy price hike can. A world economic boom has no effecs from he end of he eighies o he new cenury, bu large energy price increases are he consequence aferwards. Since boh shocks compensae each oher, he posiive reacion of domesic producion and expors mach he sylized facs. Though, he risk of an energy price induced recession seems o be limied for his ime, he oulook is herefore miscellaneous. On he one hand, if energy price movemens coninue o be demand-driven for he main par, heir effecs will coninue o be negligible. In his case wo exogenous shocks will keep on compensaing each oher. On he oher hand, if a new supply-driven energy price hike

19 9 which causes a worldwide recession akes place, he effecs migh be even sronger due o he larger openness of he energy imporing economies. References Ambler, S., A. Dib and N. Rebei (2003), Nominal Rigidiies and Exchange Rae Pass- Through in a Srucural Model of a Small Open Economy, Bank of Canada Working Paper Barsky, R. B. and L. Kilian (2004), Energy and he Macroeconomy since he 970s. Journal of Economic Perspecives 8: -34. Bernanke, B. S., M. Gerler and M. Wason (997), Sysemaic Moneary Policy and he Effecs of Energy Price Shocks. Brookings Papers on Economic Aciviy : 9-7. Blanchard, O. J. and J. Gali (2007). The Macroeconomic Effecs of Energy Shocks: Why are he 2000s so Differen from he 970s? NBER Working Paper 3368 Naional Bureau of Economic Research, Inc., Cambridge MA. Carrol, C. D., J. Overland and D. N. Weil (99), Saving and Growh wih Habi Formaion, FEDS Working Paper No Federal Reserve Board. Clarida, R., J. Gali and M. Gerler (998), Moneary Policy Rules in Pracice Some Inernaional Evidence. European Economic Review 42: Faus, J., J. H. Rogers and J. H. Wrigh (200). An Empirical Comparison of Bundesbank and ECB Moneary Policy Rules, Inernaional Finance Discussion Papers No. 70. Board of Governors of he Federal Reserve Sysem. Frondel, M. and Ch. M. Schmid (2002), The Capial-Energy Conroversy: An Arifac of Cos Shares? Energy Journal 23: Fuhrer, J. C. and G. R. Moore (99), Inflaion Persisence. Quarerly Journal of Economics 09: Hamilon, James D. (996), This is wha happened o he Energy Price-Macroeconomy Relaionship. Journal of Moneary Economics 38: Kamps, C. and C. Pierdzioch (2002), Moneary Policy Rules and Energy Price Shocks, Kiel Working Paper No Kiel Insiue of World Economics, Kiel. Kilian, Luz (2008), No all Energy Price Shocks are Alike: Disenangling Demand and Supply Shocks in he Crude Energy Marke. American Economic Review: forhcoming. Kim, I.-M. and P. Loungani (992), The Role of Energy in Real Business Cycle Models. Journal of Moneary Economics 29: McCallum, B. T. and E. Nelson (999), Nominal Income Targeing in an Open-Economy Opimizing Model. Journal of Moneary Economics 43: Sánchez, M. (2008). Energy Shocks and Endogenous Mark-ups - Resuls from an Esimaed Euro Area DSGE Model, European Cenral Bank Working Paper No European Cenral Bank, Frankfur. Schmid, T. and T. Zimmermann (200), Effecs of Energy Price Shocks on German Business Cycles, RWI Discussion Papers 3. Rheinisch-Wesfälisches Insiu für Wirschafsforschung, Essen.

20 20 Schmid, T. and T. Zimmermann (2007). Why are he Effecs of Recen Energy Price Shocks so Small?, Ruhr Economic Papers #29. Rheinisch-Wesfälisches Insiu für Wirschafsforschung, Ruhr-Universiä Bochum, Universiä Dormund, Universiä Duisburg-Essen, Essen. Schmi-Grohe, S. and M. Uribe (2003), Closing Small Open Economy Models. Journal of Inernaional Economics 6: 63-8.

21 2 Appendix A: Parameers Table A.: Consan parameers υ σ β 0.99 h 0.6 Ψ 0.02 b 0.33 η 0.33 ϕ π μ 0 0 μ 0.3 μ μ g = h σ h β σβ σβ 2 2 g2 = + h h h g 3 σ ( β h) =

22 22 Appendix B: Daa descripion GDP: Real Gross Domesic Produc. Chain index. Seasonally adjused by official source. Naional Accouns. Federal Saisical Office Germany. Consumer price level: GDP, implici Price Deflaor. Naional Accouns. Federal Saisical Office Germany. Consumpion: Real privae household consumpion. Chain index. Seasonally adjused by official source. Naional Accouns. Federal Saisical Office Germany. Expors: Real expors. Chain index. Seasonally adjused by official source. Naional Accouns.Federal Saisical Office Germany. Real Energy impors: Nominal energy impors GDP-deflaed. Foreign rade saisics. Saisical Office Germany. Real energy price: Impored energy price index 2000 = 00 GDP-deflaed. Foreign rade price saisics. Federal Saisical Office Germany. Nominal ineres rae: hree monh inerbank rae. German Bundesbank. Global GDP: Real Gross Domesic Produc of Belgium, Canada, Denmark, France, Ialy, Japan, Korea, Mexico, Neherlands, Spain, Sweden, Unied Kingdom, USA. OECD.