Department of Economics
University of Delaware
Working Paper #2006-15
Oil Shocks and Macroeconomic Activity: A Putty-Clay Perspective
David R. Stockman
I extend the Atkeson and Kehoe (1999) putty-clay model to include elastic labor supply and more general forms of technology to explore the impact of oil shocks on the macroeconomy. In particular, I am interested in (1) how this extension affects their results with regard to permanent changes in the price of oil, (2) a comparison of the business cycle properties of the putty-putty and putty-clay models, and (3) whether or not this extended putty-clay model is subject to the Rotemberg and Woodford (1996) critique of the standard perfectly competitive real business cycle model with energy. Results are reported for a wide range of parameter values illustrating that (1) contrary to the Atkeson-Kehoe result, the response of output and capital to permanent changes in the price of oil is identical in both the putty-putty and putty-clay models and is sensitive to the elasticity of substitution between capital services and labor, (2) there are stark differences in several business cycle features, namely the volatility of energy use and the correlations of output with consumption, investment and hours, and (3) the Rotemberg-Woodford critique applies to the putty-clay model revealing both amplification and timing problems.
JEL CODES: E32 and Q43
KEY WORDS: energy, putty-clay, dynamic general equilbrium