Time-Varying Oil Price Volatility and Macroeconomic Aggregates
Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research
North Carolina State University - Department of Economics
February 11, 2012
Center for Applied Economics and Policy Research Working Paper No. 2012-002
We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986-2011 and utilize the estimated process in a non-linear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead investment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result.
Number of Pages in PDF File: 39
Keywords: DSGE model, energy, oil price, stochastic volatility
JEL Classification: C32, E21, E22, Q43
Date posted: February 15, 2012
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