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Large Oil Shocks and the US Economy: Infrequent Incidents with Large Effects

Marc Gronwald

Year: 2008
Volume: Volume 29
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No1-7
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Abstract:
This paper considers the macroeconomics of the oil price for the United States. It investigates the impact of large oil price hikes in a standard VAR framework by introducing a new Markov switching based oil price specification. The explanatory power of this new specification is compared to that of a number of prominent non-linear specifications. The key findings are: (1) the new oil price specification is appropriate in both empirical and theoretical terms and allows for a well-founded distinction between �large� and �normal� oil price increases. (2) The observed impact of oil price shocks on real GDP growth is largely attributable to no fewer than three large oil price increases, namely those of 1973-74, 1979 and 1991, while variables such as consumer and import prices are also affected by normal oil price increases.





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