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Time-Varying Oil Price Volatility and Macroeconomic Aggregates

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  • Nora Traum

    (North Carolina State University)

  • Michael Plante

    (Research Department)

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 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 Society for Economic Dynamics in its series 2012 Meeting Papers with number 455.

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Date of creation: 2012
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Handle: RePEc:red:sed012:455

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  1. Luca Guerrieri & Christopher Erceg & Martin Bodenstein, 2008. "Oil Shocks and External Adjustment," 2008 Meeting Papers 945, Society for Economic Dynamics.
  2. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Keith Kuester & Juan Rubio-Ramirez, 2011. "Fiscal volatility shocks and economic activity," Working Papers 11-32, Federal Reserve Bank of Philadelphia.
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Cited by:
  1. Born, Benjamin & Pfeifer, Johannes, 2014. "Risk Matters: A Comment," Dynare Working Papers 39, CEPREMAP.
  2. Yusuf Soner Başkaya & Timur H�lag� & Hande K���k, 2013. "Oil Price Uncertainty in a Small Open Economy," IMF Economic Review, Palgrave Macmillan, vol. 61(1), pages 168-198, April.

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