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The Oil Price-Microeconomy Relationship is Alive and Well

This paper analyzes the oil price-macroeconomy relationship using a model that aims at taking into account all the sources of instability highlighted by previous studies. Mainly, we adopt a sectoral approach and weight oil prices by sectoral energy intensities. Further, inspired by Alfred Marshall's treatment of time, we also put forward a new approach to model short-term interactions between economic variables that relies on an error-correcting mechanism depending on cumulative errors. Applied to the U.S. economy, our model enables us to estimate stable relationships between oil prices and sectoral economic indicators. Further, it explains both the long-run weakening of the relationship between oil prices and aggregate economic activity and its short-run instability. We show that the oil price-macroeconomy relationship is fading but the oil price-microeconomy relationship is alive and well.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Security and Geopolitics – Energy Security; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q48 - Energy: Government Policy
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Econometric modeling, Macroeconomic fluctuations, Oil price changes

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No1-2

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Published in Volume 32, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.