The relationship between oil prices and long-term interest rates
AbstractWe estimate a seven-variable-VAR for the U.S. economy on postwar data using long-run restrictions, taking changes in long-run interest rates and inflation expectations into account. We find a strong connection between oil prices and long-run nominal interest rates which has lasted throughout the entire postwar period. We find that a simple off-the-shelf theoretical model of oil prices and monetary policy, where oil prices are flexible and other prices are sticky, in fact predicts a strong relationship if inflation and oil prices were driven by monetary policy. The observed magnitude of this relationship is still a bit of a puzzle, but this finding does call into question the identification techniques commonly used to identify oil shocks
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1637.
Length: 32 pages
Date of creation: Jul 2010
Date of revision:
Oil shocks; interest rates; inflation;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- N50 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - General, International, or Comparative
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-21 (All new papers)
- NEP-BEC-2010-08-21 (Business Economics)
- NEP-CBA-2010-08-21 (Central Banking)
- NEP-ENE-2010-08-21 (Energy Economics)
- NEP-MAC-2010-08-21 (Macroeconomics)
- NEP-MON-2010-08-21 (Monetary Economics)
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- Arora, Vipin & Tanner, Matthew, 2013.
"Do oil prices respond to real interest rates?,"
Elsevier, vol. 36(C), pages 546-555.
- Arora, Vipin & Tanner, Matthew, 2011. "How important are real interest rates for oil prices?," MPRA Paper 35883, University Library of Munich, Germany.
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