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Oil Prices and Economic Activity: A Brief Update

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  • Jamie Emerson

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    (Salisbury University)

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    Abstract

    Using recent data, this paper investigates whether changes in oil prices have the expected effects on the US economy. Cointegration analysis and vector error correction models are employed in order to evaluate the impact of changing oil prices on US output and inflation. Further, impulse response analysis is performed to assess how shocks to oil prices affect the aggregate price level and aggregate economic activity. Our findings indicate, as expected, that regardless of the sample period considered, an oil price shock leads to higher inflation and lower industrial production in the US economy.

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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I2-P131.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 30 (2010)
    Issue (Month): 2 ()
    Pages: 1411-1424

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    Handle: RePEc:ebl:ecbull:eb-10-00128

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    Related research

    Keywords: Cointegration; Vector Error Correction; Impulse Response; Oil Price Shocks;

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    1. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, Elsevier, vol. 58(1), pages 17-29, January.
    2. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
    3. Stephen P.A. Brown & Mine K. Yücel, 1999. "Oil prices and U.S. aggregate economic activity: a question of neutrality," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, Federal Reserve Bank of Dallas, issue Q II, pages 16-23.
    4. Hamilton, James D & Herrera, Ana Maria, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(2), pages 265-86, April.
    5. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(4), pages 115-134, Fall.
    6. Kevin L. Kliesen, 2008. "Oil and the U.S. macroeconomy: an update and a simple forecasting exercise," Working Papers, Federal Reserve Bank of St. Louis 2008-009, Federal Reserve Bank of St. Louis.
    7. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 975-1000, June.
    8. Nathan S. Balke & Stephen P.A. Brown & Mine K. Yucel, 2002. "Oil Price Shocks and the U.S. Economy: Where Does the Asymmetry Originate?," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 27-52.
    9. Hui Guo & Kevin L. Kliesen, 2005. "Oil price volatility and U.S. macroeconomic activity," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 669-84.
    10. Bernanke, Ben S & Gertler, Mark & Watson, Mark W, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Reply," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(2), pages 287-91, April.
    11. Hooker, Mark A., 1996. "This is what happened to the oil price-macroeconomy relationship: Reply," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(2), pages 221-222, October.
    12. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(2), pages 215-220, October.
    13. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    14. Peter Ferderer, J., 1996. "Oil price volatility and the macroeconomy," Journal of Macroeconomics, Elsevier, Elsevier, vol. 18(1), pages 1-26.
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