Oil Shocks and the U.S. Economy in a Data-rich Model

44 Pages Posted: 29 Aug 2020 Last revised: 22 Nov 2021

See all articles by Kuhelika De

Kuhelika De

Grand Valley State University - Department of Economics

Ryan A. Compton

University of Manitoba

Daniel Giedeman

Grand Valley State University - Department of Economics

Date Written: November 19, 2021

Abstract

Are all oil price shocks the same? We investigate the effects of three types of global crude oil price shocks using a factor augmented VAR framework and 185 monthly macroeconomic indicators from 1978 to 2017. Our results indicate that while both demand and supply driven oil price shocks lead to a significant increase in the global crude oil price and high degree of pass-through to US consumer and producer prices, oil specific precautionary demand shocks are the main drivers of fluctuations in the price of crude oil and the US price level, followed by global economic activity oil demand shocks. Further, while increases in the price of oil triggered by oil supply shocks lower US economic activity, those triggered by global economic activity oil demand shocks are associated with increased US economic activity. Our results suggest the need for monetary policy to stabilize the pass-through from global crude oil prices to domestic inflation.

Keywords: Oil Demand Shocks, Oil Supply Shocks, Oil Price, Monetary Policy, Exchange Rate, Factor Model, FAVAR

JEL Classification: C32, E31, E44, E52, F41, Q4

Suggested Citation

De, Kuhelika and Compton, Ryan A. and Giedeman, Daniel, Oil Shocks and the U.S. Economy in a Data-rich Model (November 19, 2021). Available at SSRN: https://ssrn.com/abstract=3658783 or http://dx.doi.org/10.2139/ssrn.3658783

Kuhelika De (Contact Author)

Grand Valley State University - Department of Economics ( email )

3072 L. William Seidman Center
50 Front Avenue SW
Grand Rapids, MI 49504
United States
616-331-7460 (Phone)

Ryan A. Compton

University of Manitoba ( email )

501 F.A. Bldg
Winnipeg R3T 5V4, Manitoba R3T 5V5
Canada

Daniel Giedeman

Grand Valley State University - Department of Economics ( email )

478c DeVos Center
Grand Rapids, MI 49504
United States

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