Abstract
This paper investigates whether the USA and Japan have become better insulated from oil price disturbances due to more favorable structural conditions: new production technologies allowing greater energy substitution, the development of energy commodity markets, reduced energy-intensity of production, more market-oriented energy policies, and so on. We decompose the influences of oil shocks on real GNP growth and inflation movements in the context of a simultaneous equation model where identification is partly achieved by restricting the long-run dynamics. We find that oil shocks accounted for a greatly reduced fraction of real GNP growth and inflation variance in both countries primarily because of superior insulation characteristics rather than reduced importance of oil disturbances. Our estimates suggest that a similar percentage oil price hike would have exerted about one-quarter the contractionary effect on real GNP and upward push in inflation in the 1980s compared with the previous two decades. (JEL: E31, E32, F30).
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