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Oil and the macroeconomy in a changing world: a conference summary

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  • Christopher L. Foote
  • Jane S. Little

Abstract

Analysis of oil-price movements is once again an important feature of economic policy discussions. To provide some background for this analysis, this paper summarizes a conference on the oil market held at the Federal Reserve Bank of Boston in June 2010. Four cross-cutting themes emerged from this symposium, which included scientific experts, market participants, business leaders, academics, and policymakers. First, the decline in real oil prices that followed the 1970s' oil shocks is unlikely to be repeated today, because there are fewer ways in which oil-importing countries can reduce oil demand or expand domestic supplies in response to higher prices. The second lesson of the conference, however, is that any prediction about oil markets is highly uncertain, a fact illustrated by the wide confidence intervals that result when futures-market data are used to quantify forecast uncertainty. Third, there is little consensus on whether new financial investment in commodity index funds has increased the volatility of oil prices. Finally, changes in oil prices still have large effects on the economy. Some research suggests that the rapid run-up in oil prices in 2007–08 may have significantly weakened the U.S. economy in the early stages of the Great Recession.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 11-3.

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Date of creation: 2011
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Handle: RePEc:fip:fedbpp:11-3

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Keywords: Petroleum products - Prices;

References

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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.
  2. Eyal Dvir & Kenneth S. Rogoff, 2009. "Three Epochs of Oil," NBER Working Papers 14927, National Bureau of Economic Research, Inc.
  3. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  4. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  5. James D. Hamilton, 2010. "Causes and consequences of the oil shock of 2007–08," CQER Working Paper 2009-02, Federal Reserve Bank of Atlanta.
  6. Kilian, Lutz & Murphy, Dan, 2010. "The Role of Inventories and Speculative Trading in the Global Market for Crude Oil," CEPR Discussion Papers 7753, C.E.P.R. Discussion Papers.
  7. Baumeister, Christiane & Kilian, Lutz, 2011. "Real-Time Forecasts of the Real Price of Oil," CEPR Discussion Papers 8414, C.E.P.R. Discussion Papers.
  8. Edelstein, Paul & Kilian, Lutz, 2007. "Retail Energy Prices and Consumer Expenditures," CEPR Discussion Papers 6255, C.E.P.R. Discussion Papers.
  9. Gary Gorton & K. Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," Yale School of Management Working Papers amz2619, Yale School of Management, revised 01 Mar 2005.
  10. James D. Hamilton, 2010. "Nonlinearities and the Macroeconomic Effects of Oil Prices," NBER Working Papers 16186, National Bureau of Economic Research, Inc.
  11. Ron Alquist & Lutz Kilian & Robert J. Vigfusson, 2011. "Forecasting the Price of Oil," Working Papers 11-15, Bank of Canada.
  12. Kilian, Lutz, 2009. "Why Agnostic Sign Restrictions Are Not Enough: Understanding the Dynamics of Oil Market VAR Models," CEPR Discussion Papers 7471, C.E.P.R. Discussion Papers.
  13. Lutz Kilian & Robert J. Vigfusson, 2011. "Are the responses of the U.S. economy asymmetric in energy price increases and decreases?," Quantitative Economics, Econometric Society, vol. 2(3), pages 419-453, November.
  14. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 766-779, September.
  15. Eyal Dvir & Ken Rogoff, 2009. "The Three Epochs of Oil," Boston College Working Papers in Economics 706, Boston College Department of Economics.
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Cited by:
  1. James D. Hamilton, 2012. "Oil Prices, Exhaustible Resources, and Economic Growth," NBER Working Papers 17759, National Bureau of Economic Research, Inc.

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