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The relationship between oil prices and long-term interest rates

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  • Christopher Reicher
  • Johannes Utlaut
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    Abstract

    We 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 Info

    Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1637.

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    Length: 32 pages
    Date of creation: Jul 2010
    Date of revision:
    Handle: RePEc:kie:kieliw:1637

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    Related research

    Keywords: Oil shocks; interest rates; inflation;

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    Cited by:
    1. Arora, Vipin & Tanner, Matthew, 2013. "Do oil prices respond to real interest rates?," Energy Economics, Elsevier, vol. 36(C), pages 546-555.

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