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Oil Shocks and the Macroeconomy: The Role of Price Variability

Kiseok Lee, Shawn Ni, and Ronald A. Ratti

Year: 1995
Volume: Volume16
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No4-2
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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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