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Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996

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  • Donald W. Jones, Paul N. Leiby and Inja K. Paik

Abstract

This paper reports on developments in theoretical and empirical understanding of the macroeconomic consequences of oil price shocks since 1996, when the U.S. Department of Energy sponsored a workshop summarizing the state of understanding of the subject. Four major insights stand out. First, theoretical and empirical analyses point to intra- and intersectoral reallocations in response to shocks, generating asymmetric impacts for oil price increases and decreases. Second, the division of responsibility for post-oil-price shock recessions between monetary policy and oil price shocks, has leaned heavily toward oil price shocks. Third, parametric statistical techniques have identified a stable, nonlinear, relationship between oil price shocks and GDP from the late 1940s through the third quarter of 2001. Fourth, the magnitude of effect of an oil price shock on GDP, derived from impulse response functions of oil price shocks in the GDP equation of a VAR, is around -0.05 and -0.06 as an elasticity, spread over two years, where the shock threshold is a price change exceeding a three-year high.

Suggested Citation

  • Donald W. Jones, Paul N. Leiby and Inja K. Paik, 2004. "Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-32.
    • Handle: RePEc:aen:journl:2004v25-02-a01
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    1. Peter Ferderer, J., 1996. "Oil price volatility and the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 1-26.
    2. Alan A. Carruth & Mark A. Hooker & Andrew J. Oswald, 1998. "Unemployment Equilibria And Input Prices: Theory And Evidence From The United States," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 621-628, November.
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    5. Severin Borenstein & A. Colin Cameron & Richard Gilbert, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 305-339.
    6. Sakellaris, Plutarchos, 1997. "Irreversible Capital and the Stock Market Response to Shocks in Profitability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 351-379, May.
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    JEL classification:

    • F0 - International Economics - - General

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