Lower Oil Prices and the U.S. Economy: Is this Time Different?

57 Pages Posted: 28 Feb 2017

See all articles by Christiane Baumeister

Christiane Baumeister

University of Notre Dame; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 09, 2017

Abstract

We explore the effect on U.S. real GDP growth of the sharp and sustained decline in the global price of crude oil and hence in the U.S. price of gasoline after June 2014. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percentage points of real GDP growth by raising private real consumption and non-oil related business investment and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. This stimulating effect, however, has been largely offset by a large reduction in real investment by the oil sector. Hence, the net stimulus since June 2014 has been close to zero. We show that the response of the U.S. economy was not fundamentally different from that observed after the oil price decline of 1986. Then as now the response of the U.S. economy is consistent with standard economic models of the transmission of oil price shocks. We found no evidence of an additional role for frictions in reallocating labor across sectors or for increased uncertainty about the price of gasoline in explaining the sluggish response of U.S. real GDP growth. Nor did we find evidence of financial contagion, of spillovers from oil-related investment to non-oil related investment, of an increase in household savings, or of households deleveraging.

Keywords: stimulus, oil price decline, uncertainty, reallocation, savings, shale oil, oil loans

JEL Classification: E320, Q430

Suggested Citation

Baumeister, Christiane and Kilian, Lutz, Lower Oil Prices and the U.S. Economy: Is this Time Different? (February 09, 2017). CESifo Working Paper Series No. 6322. Available at SSRN: https://ssrn.com/abstract=2924456

Christiane Baumeister (Contact Author)

University of Notre Dame ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

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Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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