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Time-varying oil price volatility and macroeconomic aggregates

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  • Michael Plante
  • Nora Traum

Abstract

We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business-cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986–2011 and utilize the estimated process in a nonlinear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead investment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1201.

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Date of creation: 2012
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Handle: RePEc:fip:feddwp:1201

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Keywords: Time-series analysis ; Consumption (Economics) ; Capital investments ; Natural resources ; Energy consumption;

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  1. Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics 0507005, EconWPA.
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  8. Michael Plante, 2012. "How should monetary policy respond to changes in the relative price of oil? considering supply and demand shocks," Working Papers 1202, Federal Reserve Bank of Dallas.
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  12. Benjamin Born & Johannes Pfeifer, 2011. "Policy Risk and the Business Cycle," Bonn Econ Discussion Papers bgse06_2011, University of Bonn, Germany.
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  16. Marcelo Veracierto, 1998. "Plant level irreversible investment and equilibrium business cycles," Working Paper Series WP-98-1, Federal Reserve Bank of Chicago.
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Cited by:
  1. Benjamin Born & Johannes Pfeifer, 2014. "Risk Matters: A Comment," CESifo Working Paper Series 4793, CESifo Group Munich.
  2. Yusuf Soner Baskaya & Timur Hulagu & Hande Kucuk, 2013. "Oil Price Uncertainty in a Small Open Economy," Working Papers 1309, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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