philipp m hildebrand : monetary policy and oil prices - a new paradigm? speech by mr philipp m hildebrand, member of the governing board of the swiss national bank, to the swiss - american chamber of commerce union league club, new york, 18 november 2004. * 1. * * introduction the rapid rise in oil prices since the beginning of 2004 brings painful memories of the global economic consequences of the oil shocks during the 1970s. crude oil prices reached a nominal all - time - high of 55 usd per barrel wti at the end of october. the current 46 usd mark is comparable to the previous all time nominal price peak in 1979. apart from similar nominal oil price levels, today ’ s macroeconomic conditions are very different from those of 1970s. presently, inflation rates are low throughout much of the world. inflation expectations are generally well anchored. central banks have proven their commitment to price stability. in real terms, the current spot price for crude oil is nowhere near the peak levels of the late 1970s. moreover, during the last thirty years, developed economies have become substantially less dependent on oil ( see figure 1 ). the 1970s are not an appropriate model for today ’ s economic environment. nonetheless, recent oil price developments have been remarkable. since 2000, the average price of light, sweet crude oil has been around 30 usd. this is significantly higher than the average price level of 18 usd between 1986 and 1999. even if one adjusts these prices for inflation, the difference remains substantial. while not establishing a statistically reliable trend, these figures provide at least tentative support to the hypothesis of an upward level shift in the equilibrium price range of oil ( see figure 2 ). for a central bank concerned with maintaining price stability, it is important to examine such a hypothesis in some detail. my remarks today will initially focus on a number of factors that support the equilibrium price level shift argument. i will then briefly examine to what extent information extracted from the oil market confirms the hypothesis of a persistent level shift in oil prices. finally, i will discuss how higher oil prices affect aggregate output and inflation and consider their consequences for monetary policy with a brief reference to the current economic situation and monetary policy challenges in switzerland. 2. oil price level shift hypothesis demand and supply of oil are strongly affected by increasing global integration. throughout the 1980s, the relationship between oil prices and economic output was characterized by a largely one - way causal effect from oil prices to economic growth. today, the opposite dynamic appears to have become

##makers and market participants alike can best contribute to the development of a reformed and robust financial architecture. i see more promise than peril over the horizon. the speed of these changes in the financial architecture understandably brings fear to some market participants, but it may equally sow the seeds of recovery. policymakers are keenly observing the pulse of private financial institutions and other market participants to gauge their ability to take up the cause of reform and renewal. if financial institutions readily and steadily approach new ways of intermediating credit, the real economy might recover sooner and with more vigor than expected. if not, if private market participants prove unable or unwilling to establish new business models, then the effects of the current financial market turmoil may be a significant drag on economic growth long after stability is ostensibly achieved. getting the architecture right is essential to address the central challenge facing our economy. see warren buffett ( 2008 ), “ buy american. i am. ” an op - ed in new york times, october 17.