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Accounting for Oil Price Variation and Weakening Impact of the Oil Crisis

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  • Naohisa Hirakata

    (Associate Director, Financial Systems and Bank Examination Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp))

  • Nao Sudo

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp))

Abstract

Recent empirical studies reveal that the oil price-output relationship is weakening in the US. Oil price-output correlation is less negative, and output reduction in response to oil price rise is more moderate after mid 1980s. In contrast to the conventional view that there have been changes in the economic structures that have made output less responsive to oil price shocks, we show that what have changed are the sources of oil price variation. We develop a DSGE model where oil price and US output are endogenously determined by the exogenous movements of US TFP and the oil supply. Having no changes in economic structure, our model yields dynamics of the oil price and output that show a weakening in the oil price-output relationship. There are changes in the way that the exogenous variables evolve. Two changes are important. First, oil supply variation has become moderate in recent years. Second, oil supply shortage is no longer followed by a large decline in TFP. We show that less volatile oil supply variation results in less negative oil price- output correlations, and a smaller TFP decline during oil supply shortfall implies a smaller output decline during oil price increases.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-01.

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Date of creation: Jan 2009
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Handle: RePEc:ime:imedps:09-e-01

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Keywords: Oil Price Accounting; DSGE Model; Total Factor Productivity (TFP);

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Cited by:
  1. repec:acb:camaaa:2011-17 is not listed on IDEAS
  2. Vipin Arora, 2011. "Asset Value, Interest Rates and Oil Price Volatility," The Economic Record, The Economic Society of Australia, vol. 87(s1), pages 45-55, 09.
  3. Vipin Arora & Pedro Gomis-Porqueras, 2011. "Oil Price Dynamics in a Real Business Cycle Model," CAMA Working Papers 2011-17, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Ichiro Fukunaga & Naohisa Hirakata & Nao Sudo, 2009. "The Effects of Oil Price Changes on the Industry-Level Production and Prices in the U.S. and Japan," IMES Discussion Paper Series 09-E-24, Institute for Monetary and Economic Studies, Bank of Japan.

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