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Time-Varying Oil Price Volatility and Macroeconomic Aggregates


Michael Plante


Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

Nora Traum


North Carolina State University - Department of Economics

February 11, 2012

Center for Applied Economics and Policy Research Working Paper No. 2012-002

Abstract:     
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

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Date posted: February 15, 2012  

Suggested Citation

Plante, Michael and Traum, Nora, Time-Varying Oil Price Volatility and Macroeconomic Aggregates (February 11, 2012). Center for Applied Economics and Policy Research Working Paper No. 2012-002. Available at SSRN: http://ssrn.com/abstract=2005312 or http://dx.doi.org/10.2139/ssrn.2005312

Contact Information

Michael Plante (Contact Author)
Federal Reserve Bank of Dallas ( email )
2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )
100 South Woodlawn Avenue, Wylie Hall 250
Bloomington, IN 47405-1704
United States
Nora Traum
North Carolina State University - Department of Economics ( email )
Raleigh, NC 27695-8110
United States
HOME PAGE: http://www4.ncsu.edu/~njtraum/
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