Oil and the Macroeconomy: A Quantitative Structural Analysis

44 Pages Posted: 28 Apr 2009

Date Written: March 23, 2009

Abstract

We consider an economy in which the oil costs, industrial production, and other macroeconomic variables fluctuate in response to fundamental domestic and external demand and supply shocks. We estimate the effects of these structural shocks on US monthly data for the 1973.1-2007.12 period using robust sign restrictions suggested by theory. The interplay between the oil market and the US economy goes in both directions. About 20% of changes in the cost of oil come in response to US aggregate demand shocks, while shocks originating in the oil market also affect the US economy, the impact depending on the nature of the shock: a negative oil supply shock reduces US output, whereas a positive oil demand shock has a positive and persistent effect on GDP.

Keywords: Business cycle, Oil prices, Structural VAR

JEL Classification: C32, E3, F4

Suggested Citation

Lippi, Francesco and Nobili, Andrea, Oil and the Macroeconomy: A Quantitative Structural Analysis (March 23, 2009). Bank of Italy Temi di Discussione (Working Paper) No. 704. Available at SSRN: https://ssrn.com/abstract=1396130 or http://dx.doi.org/10.2139/ssrn.1396130

Francesco Lippi

University of Sassari ( email )

Piazza Universita
Sassari, 07100
Italy

Andrea Nobili (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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