Oil Price Uncertainty
Colorado State University
University of Calgary - Economics
March 1, 2010
Journal of Money, Credit, and Banking, Forthcoming
The theories of investment under uncertainty and real options predict that uncertainty about, for example, oil prices will tend to depress current investment. We reinvestigate the relationship between the price of oil and investment, focusing on the role of uncertainty about oil prices. We find that volatility in oil prices has had a negative and statistically significant effect on several measures of investment, durables consumption and aggregate output. We also find that accounting for the effects of oil price volatility tends to exacerbate the negative dynamic response of economic activity to a negative oil price shock, while dampening the response to a positive oil price shock.
Number of Pages in PDF File: 42
Keywords: Real Options, Oil Volatility, Vector autoregression, Multivariate GARCH-in-Mean VAR.
JEL Classification: G31, E32, C32Accepted Paper Series
Date posted: June 14, 2006 ; Last revised: March 3, 2010
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