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Time-Varying Oil Price Volatility and Macroeconomic Aggregates

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  • Michael Plante

    ()
    (Federal Reserve Bank of Dallas)

  • Nora Traum

    (North Carolina State University)

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 non-linear 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 in- vestment 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 Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2012-002.

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Length: 39 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:inu:caeprp:2012-002

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  1. John Elder & Apostolos Serletis, 2010. "Oil Price Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1137-1159, 09.
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  8. R?diger Bachmann & Ricardo J. Caballero & Eduardo M. R. A. Engel, 2013. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 29-67, October.
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  16. 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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Cited by:
  1. Born, Benjamin & Pfeifer, Johannes, 2014. "Risk Matters: A Comment," Dynare Working Papers 39, CEPREMAP.
  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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