Does the Fed Respond to Oil Price Shocks?

26 Pages Posted: 21 Sep 2011

See all articles by Lutz Kilian

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Logan T. Lewis

Federal Reserve Board, Trade and Quantitative Studies

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Date Written: September 2011

Abstract

A common view in the literature is that systematic monetary policy responses to the inflation caused by oil price shocks have been an important source of aggregate fluctuations in the US economy. Earlier empirical evidence in support of such a link was based on inappropriate econometric models. We show that there is no credible evidence that monetary policy responses to oil price shocks caused large aggregate fluctuations in the 1970s and 1980s or more recently. Our analysis suggests that the traditional monetary policy reaction framework should be replaced by models that take account of the endogeneity of the real price of oil and that allow policy responses to depend on the underlying causes of oil price shocks.

Suggested Citation

Kilian, Lutz and Lewis, Logan T., Does the Fed Respond to Oil Price Shocks? (September 2011). The Economic Journal, Vol. 121, Issue 555, pp. 1047-1072, 2011. Available at SSRN: https://ssrn.com/abstract=1931360 or http://dx.doi.org/10.1111/j.1468-0297.2011.02437.x

Lutz Kilian (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Logan T. Lewis

Federal Reserve Board, Trade and Quantitative Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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