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
Date Written: May 1, 2013
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: Suggested Citation