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Oil Shocks and the Macroeconomy: The Role of Price Variability

Abstract:
In this paper we argue that an oil price change is likely to have greater impact on real GNP in an environment where oil prices have been stable, than in an environment where oil price movement has been frequent and erratic. An oil price shock variable reflecting both the unanticipated component and the time-varying conditional variance of oil price change (forecasts) is constructed and found to be highly significant in explaining economic growth across different sample periods, even when matched against various economic variables and other functions of oil price. We find that positive normalized shocks have a powerful effect on growth while negative normalized shocks do not.

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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: Q43: Energy and the Macroeconomy, Q41: Energy: Demand and Supply; Prices, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, C58: Financial Econometrics, Q35: Hydrocarbon Resources

Keywords: Oil shocks, oil prices, VAR, GARCH, US, GNP

DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No4-2

Published in Volume16, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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