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Oil shocks, monetary policy, and economic activity

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  • Michael Dotsey
  • Max Reid
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    Abstract

    Various reasons have been given to explain downturns in U.S. economic activity since World War II. Romer and Romer (1989) argued that these recessions were primarily associated with monetary contractions, while Hamilton (1983) and others attributed them to oil price increases. We investigate these competing hypotheses and find that when measures of oil prices are included, the Romers’ measure of monetary policy does not significantly explain economic downturns. However, alternative measures of monetary policy, specifically the federal funds rate the spread between the ten-year Treasury rate and the federal funds rate, are significantly linked to economic activity. We also find that Hamilton’s result that oil prices significantly influence real activity are robust to the inclusion of these alternative indicators of monetary policy.

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    File URL: http://www.richmondfed.org/publications/research/economic_review/1992/pdf/er780402.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Richmond in its journal Economic Review.

    Volume (Year): (1992)
    Issue (Month): Jul ()
    Pages: 14-27

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    Handle: RePEc:fip:fedrer:y:1992:i:jul:p:14-27:n:v.78no.4

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    Related research

    Keywords: Petroleum industry and trade ; Monetary policy ; Economic conditions;

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