Time-Varying Oil Price Volatility and Macroeconomic Aggregates
Center for Applied Economics and Policy Research Working Paper No. 2012-002
39 Pages Posted: 15 Feb 2012
Date Written: February 11, 2012
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.
Keywords: DSGE model, energy, oil price, stochastic volatility
JEL Classification: C32, E21, E22, Q43
Suggested Citation: Suggested Citation