This academic article aims to delve into the realms of the economist trinity Bjørnland, Larsen, and Maih's study, "Oil and Macroeconomic (In)stability". The paper inherently focuses on the economic dynamics imparted by oil price changes, the consequent macroeconomic instability, and roles played by the monetary policy.
Bjørnland, Larsen, and Maih's groundbreaking paper brings forth variabilities in oil prices' potential that can induce critical changes in the economic policy structure and macroeconomic stability (Bjørnland, Larsen, & Maih, 2018). Following this paper's trail, this article concentrates on dissecting their propositions and findings in-depth, providing an inclusive understanding of their academic contribution.
Bjørnland argued that the fluctuations in the oil market could have a severe impact on macroeconomic stability (Bjørnland, H. 2000). This relationship is influenced by multiple factors, such as geopolitical tensions, economic policies, natural disasters, and changes in demand and supply.
Significant changes in oil prices possess the potential to create inflationary ripple effects on the economy, acting as a catalyst for macroeconomic instability (Blanchard, O.J. and Gali, J. 2007). When oil prices surge, the cost of production also increases, which directly impacts inflation and unemployment rates. Increases in oil prices (positive oil shocks) often result in inflation and lower real GDP due to higher costs in economic activity and a reallocation of resources from oil-importing regions towards oil-exporting regions (Gordon, R.J., 1984). Bjørnland's research reaffirms these consequences and points to an incidence of greater economic instability following oil shocks. She also notes the presence of both demand and supply-driven oil shocks and their differential impact (Bjørnland, H., 2000). Bjørnland and her colleagues argue that well-crafted fiscal and monetary policies can mitigate these adverse effects, given their ability to control inflation rates and manage public debt and budget deficits (Bjørnland, H., Larsen, V. H., & Thorsrud, L. E., 2021).
Researchers found evidence supporting Bjørnland's viewpoint. For example, during the 1973 oil crisis, countries witnessed negative GDP growth and rising inflation (Hamilton, J. 1983). Similarly, the 2008 financial crisis, partly triggered by the spike in oil prices, severely affected global economic stability (Frankel, J. 2011).
The core analyses are laid out in three major sections - assessing the central arguments, research methodologies, and findings.
The economists argue for the definitive role of oil prices on the macroeconomic structure of any economy, emphasizing countries more dependent on conventional resources. In cases where oil prices reduce, the external factor's enforced variability affects the net output and inflation rates.
The authors' primary methodological resource is the Structural Vector Auto Regressive (SVAR) model. This makes it possible to study the relationship between the oil price shocks and the economy from an intricate perspective, taking into account correlations and time series data.
Their analyses confirm that oil price shocks engender significant disruptions in the output and inflation dynamics. When it comes to combating these disruptions, discretionary policies tend to increase rather than alleviate macroeconomic instability.
The study underscores the necessity for policymakers to consider the volatility of oil prices and its potential ramifications. The connections they unearth between oil price shocks, macroeconomic stability, and monetary policy hold a wealth of implications for contemporary economic paradigms and future studies.
Bjørnland, Hilde C., Vegard H. Larsen, and Junior Maih. "Oil and macroeconomic (in) stability." American Economic Journal: Macroeconomics 10.4 (2018): 128-151.
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