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Exchange Rate Experience Between the Oil Shocks, 1973-1980. Megan Garcia; Jessica Hoffer. First Oil Shock and I ts Effects. 1973-1975 War between Israel and Arab countries OPEC (Organization of Petroleum Exporting Countries International Cartel with the largest oil producers

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first oil shock and i ts effects
First Oil Shock and Its Effects
  • 1973-1975
  • War between Israel and Arab countries
  • OPEC (Organization of Petroleum Exporting Countries
    • International Cartel with the largest oil producers
    • Imposed oil embargo
slide3
1974
  • By March 1974 oil prices soared to $12 a barrel from a previous $3.
  • This slowed down consumption and investment leading to the recession
  • Current accounts balance decreased
  • Unemployment increased
  • Increases in the price of petroleum products increased the oil price affecting wages
stagflation
Stagflation
  • Combinations of stagnating output and high inflation
  • Two factors:
    • Increases in commodity prices
    • Expectations of inflation
internal and external balance
Internal and External Balance
  • Governments shifted to expansionary fiscal and monetary policies
  • Monetary growth rates rose
  • Current account deficit became a surplus and neared zero
  • However oil importing developing countries stilled had a deficit
the weak dollar
The Weak Dollar
  • 1976-1979
  • Unemployment remained high then dropped in 1978
    • 6.0% from 8.3% in 1975
  • Germany and Japan adopt expansionary policies
  • Current account pushed into a deficit
the weak dollar1
The Weak Dollar
  • U.S. expansion
  • Little confidence for investors
  • New Federal Reserve Board Chairman, Paul A. Volcker, with experience in international financial affairs
  • Tightening the economy provided a turnaround by 1979
  • Floating exchange rates deemed harmful
the second oil shock 1979 1980
The Second Oil Shock 1979-1980
  • Fall of the shah of Iran
  • Oil prices increased from $13 to $32 in 1980
  • Leading to stagflation
  • High inflation slower growth
  • This time monetary growth restricted to offset the rise in inflation
  • Saw little improvement only to lead into the deepest recession in 1981
summary
Summary
  • Lesson learned from both oil shocks is that floating exchange rates are favored
  • However after 1981 it became uncertain how successful
  • High U.S. budget deficits
  • Increase in oil production and prices lead to a volatile market