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Exchange Rate Experience Between the Oil Shocks, 1973-1980

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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Exchange Rate Experience Between the Oil Shocks, 1973-1980

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  1. Exchange Rate Experience Between the Oil Shocks, 1973-1980 Megan Garcia; Jessica Hoffer

  2. 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

  3. 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

  4. Stagflation • Combinations of stagnating output and high inflation • Two factors: • Increases in commodity prices • Expectations of inflation

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

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