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Oil prices and U.S. aggregate economic activity: a question of neutrality


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  • Stephen P.A. Brown
  • Mine K. Yücel


Considerable research finds oil price shocks have had major effects on U.S. output and inflation. Several recent studies argue that the response of monetary policy-rather than the oil price shocks themselves-caused the fluctuations in economic activity. Stephen Brown and Mine Yucel show that an oil price increase will lead to a decline in real GDP and an increase in the price level that are of a similar magnitude if the federal funds rate is unconstrained-a finding consistent with the definition of monetary neutrality in which nominal GDP is constant. Brown and Yucel also find that holding the federal funds rate constant in the face of an oil price increase is an accommodative policy that boosts real GDP, the price level, and nominal GDP. In short, the monetary authority can use accommodative policy to cushion the negative effects of higher oil prices on real GDP, but at the expense of higher inflation.

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Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1999)
Issue (Month): Q II ()
Pages: 16-23

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Handle: RePEc:fip:fedder:y:1999:i:qii:p:16-23

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Keywords: Power resources - Prices ; Gross domestic product ; Inflation (Finance);


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  1. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
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