Oil Shocks and the UK Economy: The Changing Nature of Shocks and Impact Over Time

30 Pages Posted: 20 Aug 2013

See all articles by Stephen Millard

Stephen Millard

Bank of England

Tamarah Shakir

Bank of England - Monetary Analysis

Date Written: August 16, 2013

Abstract

In this paper we examine how the impact of oil price movements on the UK economy differs depending on the underlying source of the shock, that is, whether the oil price has been driven by a supply, or demand, disturbance. In addition we employ an empirical framework with time-varying parameters to allow us to see how the impact of oil price shocks may have developed over time. In line with earlier studies on larger economies, we find that the source of the shock does indeed affect the size and nature of the eventual impact on the UK economy. Oil supply shocks typically lead to larger negative impacts on output and slightly higher increases in inflation relative to oil shocks stemming from shocks to world demand, which typically have smaller and largely positive, impacts on UK output. We find evidence that the nature of shocks in the world oil market has changed over time, with the oil price becoming more sensitive to changes in oil production. There is also evidence that the impact of oil shocks became much smaller from the mid-1980s onwards, although the impact has risen slightly since around 2004.

Keywords: oil price shocks, time-varying parameter VARs

JEL Classification: Q43

Suggested Citation

Millard, Stephen and Shakir, Tamarah, Oil Shocks and the UK Economy: The Changing Nature of Shocks and Impact Over Time (August 16, 2013). Bank of England Working Paper No. 476, Available at SSRN: https://ssrn.com/abstract=2313021 or http://dx.doi.org/10.2139/ssrn.2313021

Stephen Millard (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tamarah Shakir

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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