Abstract
This paper documents that an oil price increase generates a larger decline in output when the oil price hits a near-term high. We develop a New Keynesian model with energy and a downward nominal wage rigidity that generates asymmetric responses of the macroeconomy to energy price shocks. Specifically, a large energy price increase pushes down the real wage enough that the downward nominal wage constraint binds for several periods, which causes firms to reduce their output further. Since that mechanism is unimportant when energy prices fall, the downward nominal wage constraint causes output to react asymmetrically to oil price shocks.
Authors
- Lance J. Bachmeier
- Benjamin D. Keen
JEL codes
- E32
- Q43