Are the Macroeconomic Effects Greater from an Oil Price Shock or a Global Oil Demand Shock?

30 Pages Posted: 9 May 2014 Last revised: 14 Jul 2014

See all articles by Vance Ginn

Vance Ginn

Texas Public Policy Foundation

Date Written: May 1, 2013

Abstract

Since a higher oil price has preceded ten out of the last eleven U.S. recessions, the macroeconomic responses to different oil market shocks concern policymakers. Although these responses might be declining, there is evidence indicating it is not fluctuations in the oil price that matters but the underlying causes of the fluctuation. The primary underlying cause since the 1970s has been from a global oil demand shock. This paper examines whether the macroeconomic responses to a global oil demand shock are greater than to oil price shocks caused by other oil market factors. Estimating a four-variable VAR with quarterly data from 1974:1-2011:3 and constructing a structural VAR with long-run restrictions, I compare the responses to natural rate of unemployment, global oil demand or oil price, aggregate supply, and aggregate demand shocks on the unemployment rate, economic output, and the headline and core inflation rates. The results indicate that the responses to a global oil demand shock are greater than from other oil market shocks. Policymakers should not necessarily be concerned with the price of oil, but how their policies influence, or react, to global economic activity.

Note: USAEE published shorter version of a longer working paper

Keywords: Global oil demand shocks, oil price shocks, SVAR, long-run restrictions

JEL Classification: C32, Q43

Suggested Citation

Ginn, Vance, Are the Macroeconomic Effects Greater from an Oil Price Shock or a Global Oil Demand Shock? (May 1, 2013). USAEE Dialogue 21(1), 2013. Available at SSRN: https://ssrn.com/abstract=2434203

Vance Ginn (Contact Author)

Texas Public Policy Foundation ( email )

901 Congress Avenue
Austin, TX 78701
United States
7134785255 (Phone)

HOME PAGE: http://www.texaspolicy.com/experts/detail/vance-ginn

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