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Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy

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  • Herrera, Ana Maria
  • Hamilton, James D.

Abstract

A recent paper by Bernanke, Gertler and Watson (1997) suggests that monetary policy could be used to eliminate any recessionary consequences of an oil price shock. This paper challenges that conclusion on two grounds. First, we question whether the Federal Reserve actually has the power to implement such a policy; for example, we consider it unlikely that additional money creation would have succeeded in reducing the Fed funds rate by 900 basis points relative to the values seen in 1974. Second, we point out that the size of the effect that Bernanke, Gertler and Watson attribute to oil shocks is substantially smaller than that reported by other researchers, primarily due to their choice of a shorter lag length than used by other researchers. We offer evidence in favor of the longer lag length employed by previous research, and show that, under this specification, even the aggressive Federal Reserve policies proposed would not have succeeded in averting a downturn.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt4qp0p0v5.

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Date of creation: 01 Jul 2001
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Handle: RePEc:cdl:ucsdec:qt4qp0p0v5

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Related research

Keywords: regime switch; oil shocks;

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Citations

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Cited by:
  1. Jose De Gregorio. & Oscar Landerretche. & Christopher Neilson., 2007. "Another Pass-Through Bites the Dust? Oil Prices and Inflation," Working Papers Central Bank of Chile 417, Central Bank of Chile.
  2. Jaime Casassus & Freddy Higuera, 2011. "Stock Return Predictability and Oil Prices," Documentos de Trabajo 406, Instituto de Economia. Pontificia Universidad Católica de Chile..
  3. Casassus, Jaime & Ceballos, Diego & Higuera, Freddy, 2010. "Correlation structure between inflation and oil futures returns: An equilibrium approach," Resources Policy, Elsevier, vol. 35(4), pages 301-310, December.
  4. Mandal, Kumarjit & Bhattacharyya, Indranil & Bhoi, Binod B., 2012. "Is the oil price pass-through in India any different?," Journal of Policy Modeling, Elsevier, vol. 34(6), pages 832-848.
  5. Yang, Lucun, 2011. "An Empirical Analysis of Current Account Determinants in Emerging Asian Economies," Cardiff Economics Working Papers E2011/10, Cardiff University, Cardiff Business School, Economics Section.
  6. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor Rules in a Structural VAR," IMF Working Papers 10/20, International Monetary Fund.
  7. Aliyu, Shehu Usman Rano, 2009. "Oil Price Shocks and the Macroeconomy of Nigeria: A Non-linear Approach," MPRA Paper 18726, University Library of Munich, Germany, revised 16 Nov 2009.
  8. Rebeca Jiménez-Rodríguez, 2004. "Oil Price Shocks: Testing for Non-linearity," CSEF Working Papers 115, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  9. Francesco Ravazzolo & Philip Rothman, 2010. "Oil and US GDP: A real-time out-of-sample examination," Working Paper 2010/18, Norges Bank.
  10. Hernandez Martinez, Fernando, 2009. "Efectos del incremento del precio del petróleo en la economía española: Análisis de cointegración y de la política monetaria mediante reglas de Taylor
    [Oil price shocks and the spanish econom
    ," MPRA Paper 18056, University Library of Munich, Germany.
  11. Richard G. Anderson & Jane M. Binner & Vincent A. Schmidt, 2011. "Connectionist-based rules describing the pass-through of individual goods prices into trend inflation in the United States," Working Papers 2011-007, Federal Reserve Bank of St. Louis.
  12. Möbert, Jochen, 2007. "Crude Oil Price Determinants," Darmstadt Discussion Papers in Economics 35713, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  13. Mardi Dungey, 2001. "International Shocks and the Role of Domestic Policy in Australia," CEPR Discussion Papers 443, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  14. Virjinia Jeliazkova, 2010. "Effects of the Dynamics of the Oil Price – Theoretical and Empirical Bases," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 127-165.

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