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The Oil Price-Microeconomy Relationship is Alive and Well

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  • Francçois Lescaroux

Abstract

This paper analyzes the oil price-macroeconomy relationship using a model that aims at taking into account all the sources of instability highlighted by previous studies. Mainly, we adopt a sectoral approach and weight oil prices by sectoral energy intensities. Further, inspired by Alfred Marshall's treatment of time, we also put forward a new approach to model short-term interactions between economic variables that relies on an error-correcting mechanism depending on cumulative errors. Applied to the U.S. economy, our model enables us to estimate stable relationships between oil prices and sectoral economic indicators. Further, it explains both the long-run weakening of the relationship between oil prices and aggregate economic activity and its short-run instability. We show that the oil price-macroeconomy relationship is fading but the oil price-microeconomy relationship is alive and well.

Suggested Citation

  • Francçois Lescaroux, 2011. "The Oil Price-Microeconomy Relationship is Alive and Well," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 25-48.
  • Handle: RePEc:aen:journl:2011v32-01-a02
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    References listed on IDEAS

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    1. Jay Zarnikau, 1999. "A Note: Will Tomorrow's Energy Efficiency Indices Prove Useful in Economic Studies?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 139-145.
    2. Kiseok Lee & Shawn Ni & Ronald A. Ratti, 1995. "Oil Shocks and the Macroeconomy: The Role of Price Variability," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 39-56.
    3. Keane, Michael P & Prasad, Eswar S, 1996. "The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 389-400, August.
    4. Knut Anton Mork & Oystein Olsen & Hans Terje Mysen, 1994. "Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 19-36.
    5. Ricardo Mourinho Félix & Vanda Almeida, 2006. "Computing Potential Output and the Output Gap for the Portuguese Economy," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    6. John A. Tatom, 1993. "Are There Useful Lessons from the 1990-91Oil Price Shock?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 129-150.
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    Cited by:

    1. Alom, Fardous, 2011. "Economic Effects of Oil and Food Price Shocks in Asia and Pacific Countries: An Application of SVAR Model," 2011 Conference, August 25-26, 2011, Nelson, New Zealand 115346, New Zealand Agricultural and Resource Economics Society.
    2. Kai Carstensen & Steffen Elstner & Georg Paula, 2011. "How Strongly Did the 2007/08 Oil Price Hike Contribute to the Subsequent Recession?," CESifo Working Paper Series 3357, CESifo Group Munich.
    3. Fardous Alom, 2014. "Oil Price-Macroeconomic Relationship in Australia and New Zealand: Application of a Hidden Cointegration Technique," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 6(2), pages 105-128, July.
    4. Paula, Georg, 2011. "Three Empirical Essays in Economics Using Firm Level Panel Data," Munich Dissertations in Economics 13839, University of Munich, Department of Economics.

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    JEL classification:

    • F0 - International Economics - - General

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