Oil Price Shocks and Monetary Policy in a Data-Rich Environment

51 Pages Posted: 26 May 2013

Date Written: April 4, 2013

Abstract

This paper examines the impact of different types of oil price shocks on the U.S. economy, using a factor-augmented VAR (FAVAR) approach. The results indicate that when examining the effects of oil price shocks, it is important to account for the interaction between the oil market and the macroeconomy. I find that oil demand shocks are more important than oil supply shocks in driving several macroeconomic variables, and that the origin of demand shocks matter. Specifically, the U.S. economy and monetary policy respond differently to global demand shocks that have the effect of raising the price of oil and to oil-specific demand shocks.

Keywords: Oil demand shocks, Oil supply shocks, Business cycle, Monetary policy, Factor model, FAVAR

JEL Classification: C3, E31, E32, E4, E5, Q43

Suggested Citation

Aastveit, Knut Are, Oil Price Shocks and Monetary Policy in a Data-Rich Environment (April 4, 2013). Norges Bank Working Paper 2013 | 10, Available at SSRN: https://ssrn.com/abstract=2269590 or http://dx.doi.org/10.2139/ssrn.2269590

Knut Are Aastveit (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

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