Oil Shocks and Total Factor Productivity in Resource-Poor Economies: The Cases of France and Germany

Abstract

This paper shows that the two oil shocks that occurred in 1974-85 and 2003-15 inflicted sizable damage to total factor productivity (TFP) in France and Germany. These are resource-poor economies whose firms are importing most of their inputs of extractive commodities. The real prices they pay for them impact directly on their value added and hence on GDP in aggregate. We single out the price of crude oil as the most important and volatile of this set of highly correlated prices. This real price depends both on the world commodity market and on the exchange rates between the US dollar and the relevant European currencies, themselves determined by monetary policy in the US and in Europe. The significance of this mechanism is confirmed econometrically, and its quantitative implications are assessed. On average, these countries have lost more than 1% of potential TFP per year during these oil shocks, Germany being affected noticeably more severely than France. Historical analysis shows that episodes of US dollar appreciation have significant impacts on French and German TFP via this channel.

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Reference

Jean-Paul Azam, “Oil Shocks and Total Factor Productivity in Resource-Poor Economies: The Cases of France and Germany”, TSE Working Paper, n. 20-1126, July 2020, revised September 2020.