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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  

Michael Plante

Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

Nora Traum

North Carolina State University - Department of Economics

Date Written: February 11, 2012

Abstract

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

Plante, Michael and Traum, Nora, Time-Varying Oil Price Volatility and Macroeconomic Aggregates (February 11, 2012). Center for Applied Economics and Policy Research Working Paper No. 2012-002. Available at SSRN: https://ssrn.com/abstract=2005312 or http://dx.doi.org/10.2139/ssrn.2005312

Michael Plante (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )

100 South Woodlawn Avenue, Wylie Hall 250
Bloomington, IN 47405-1704
United States

Nora Traum

North Carolina State University - Department of Economics ( email )

Raleigh, NC 27695-8110
United States

HOME PAGE: http://www4.ncsu.edu/~njtraum/

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