Oil Shocks and other Determinants of Inflation in the US (Dissertation Review Sample)

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Oil Shocks and other Determinants of Inflation in the US
Abstract
This paper provides an econometric analysis of inflation in the United States. It focuses on oil price shocks and other determinants of inflation. The researcher also explores the role of resource utilization, inflation expectations, and persistence, the roles of imports, financial markets, and unemployment among others. The paper will also include a cross-sectional analysis of inflation dynamics over episodes of persistent of large slack and slow inflation. The paper will focus on the period when the U.S experienced several periods of high inflation that have been partially attributed to positive oil price shocks, as well as, the responsiveness of the U.S inflation on oil price shock. Currently, economic theory that is supported by empirical data demonstrate that oil price shock can contribute to short run changes in inflation since inflation is seen as the average price of final goods produced in a given economy and the implications derived from an input price can differ from the Consumer Price Index (CPI) that is used to determine the average price of consumption. The findings of the study will reveal that, as oil price increases, the nominal value added falls whereas the domestic real value added remains at a constant rate; hence resulting to a short run deflation in value added measures, such as, the CPI. This means that CPI will experience rising inflation due to an increase in oil price. The paper’s findings will include periods of financial crises, stability of inflation expectations, and maintenance of real inflation.
Table of Contents
Abstract…………………………………………………………………………………….1Introduction………………………………………………………………………………..3Literature review…………………………………………………………………………...7Inflation model for US……….…………………………………………………………….9
Econometric Methodology………………………………………………………………..19
Discussion……….…………………………………………………………………………21Conclusion…………………………………………………………………………………26References…………………………………………………………………………………28Appendix………………………………………………………………………………….32
1.0 Introduction
Inflation in any economic environment depicts the constant rise in the overall price level of commodities and services for a specific period. Since a certain amount of currency purchases particular amount or quality of a good or service, inflation shows the decrease in the buying power per unit of the dollar. This generally accounts for value loss in exchange rates and economical records (Abel and Bernanke 2005).
1.1 The history of inflation in the U.S
The Great Inflation of the U.S was caused by an error in monetary policy and the Inflation Stabilization as a result of a restoration of a more effective monetary policy. Monetary policy was considered to be too accommodative during the period of the Great Inflation; hence, sizable inflations are considered not to have the capacity to endure such accommodations. However, earlier researchers do not attribute the Great Inflation to oil or commodity shocks or to other cost-push events per se (Sill, 2007). This was basically attributed to policy ignorance, and the historical accounts of the Great Inflation had various variants. The first variant is that policy makers, in the latter 1960’s, made attempts to exploit a pre-accelerationist Phillips curve only to observe that over time, the short term relationship between inflation and unemployment was unstable, whereas the long-term Phillips curve was vertical. Therefore, the shift to a less accommodative Federal government policy reflected in an appositive real interest rate response that resulted into inflation news.
On the other hand, there were some arguments that suggested that policy makers projected a rise in inflation, in order to, exploit a short-term Phillips curve in contrast with observed negative response of a short-term real interest rate to the inflation that was broadcasted prior to 1979. In addition, there was also a learning model that suggested that the U.S policy makers should have understood that by early 1970’s. Therefore, the long-run Phillip curve was vertical. Inflation generally drifted higher during the time and exceeded the figures that were predicted, having allowed inflation to increase in the 1960’s. This was aimed at improving economic growth because the U.S policy makers limited monetary tightening in the 1970’s because it was believed that real economic activity and growth would slacken inflation. In 1980's, policy makers in the U.S, returned to an assessment that once prevailed in the 1950’s based on an economic capacity to push the economy beyond a level that would quicken inflation and result to substantial and rapid costs.
Fig 1: History of inflation in the U.S
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The quantity of the dollar supply in the United States showed changes from time to time. In the global historical period where gold was the major form of currency, the rate at which the gold coins are processed determined the supply of money and the value of each coin (Auernheeimer, 1974). For instance, the advancement of mixing gold and other cheaper metals to process coins enhanced money supply and promote the reduction of the value of each coin. Therefore, as supply of money increased, the value of the same money reduced and, so people paid more for the same services that cost less when the supply was more restricted.
In the United States, the Bureau of Labor Statistics monitors the percentage of inflation rates over the years, and the unit used is the Consumer Price Index (CPI) (Blanchard, 2006). The rates recorded from 1929 shows how the United States installed efforts to stimulate the economy hence tackle levels of inflation. In this year, the country experienced a serious fall of its stock markets that led to a great depression in the overall economy. The inflation rate recorded by the end of that year was 0.6% with a minimal rate of unemployment and low but steady developments experienced in the country. The next year recorded a negative contraction in the annual Gross Domestic Product (GDP) that tremendously reduced throughout 1932. This GDP contraction ended in around March, and the economical cycle settled at a trough level when Black took over from Meyer as the Fed chairperson (Blanchard and Jordi, 2007).
The United States economical expansion begun in 1935 until 1938 when the country experienced another contraction that ran until June the same year to a trough. There was an inflation rate of up to 3% and unemployment rates reduced to 16.9% in 1936 from 24.9 in 1933. In May 1937, economical depression reignited as the country reached a peak in the contractions before the Dust Bowl drought experienced between 1938 and 1939 (Oliver, 2010). During the Word War2, United States recorded economical expansions with inflation rates of about 9% due to the high government spending to fund the war. This drastically dropped to 2.3% in 1944 when the whole world recognized the US Dollar as the global currency.
After the end of WW II, the U.S started a three-year economical expansion with a contraction of about 10.9% (Federal Reserve Bank of Boston). This was because of the reduced government spending and the minimal circulation of the dollar to help retain its value. The shaky trend of the American economical cycle continued due to the Cold War, the Korean War, the Cuban Missile, the invasion by the Bay of Pigs and other political issues that required government spending. Nevertheless, the economy expanded as well as recorded very low inflation rates until 1973. This trend pulled off when the dollar became off the gold standard; hence tripling the inflation rate from approximately 3% to 9% and about 12% in 1974. During this period, the economically cycle was at contraction and ended with a trough in March 1975 before picking up again (Mankiw, 2007).
In 1982, St. Germaine established a Depository Act to help control recession. This led to a stable record of 3...