Oil Shocks Through Transport Costs: Evidence from U.S. Business Cycles

Abstract:     
The effects of oil shocks on the business cycles through transport costs are investigated. In order to distinguish between oil supply and oil demand shocks, the price of oil is endogenously determined through a transportation sector that uses oil as an input. The equilibrium nominal price of oil depends on the future expected oil supply shocks and the interest rate, where the latter is due to the intertemporal consumption decision of the individuals; the equilibrium real price of oil depends on the global real economic activity together with the global endowment of oil. The model is estimated for the U.S. economy using six macroeconomic time series, including data on transport costs and gasoline prices. The estimated model is further used to investigate the historical volatilities in oil prices and their effects on the historical U.S. business cycles.

Number of Pages in PDF File: 52

working papers series