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Lower Oil Prices and the U.S. Economy: Is This Time Different?

Author

Listed:
  • Christiane Baumeister

    (University of Notre Dame)

  • Lutz Kilian

    (University of Michigan)

Abstract

We explore the effect on U.S. real GDP growth of the sharp and sustained decline in the global price of crude oil and hence in the U.S. price of gasoline after June 2014. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percentage points of real GDP growth by raising private real consumption and non-oil related business investment and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. This stimulating effect, however, has been largely offset by a large reduction in real investment by the oil sector. Hence, the net stimulus since June 2014 has been close to zero. We show that the response of the U.S. economy was not fundamentally different from that observed after the oil price decline of 1986. Then as now the response of the U.S. economy is consistent with standard economic models of the transmission of oil price shocks. We found no evidence of an additional role for frictions in reallocating labor across sectors or for increased uncertainty about the price of gasoline in explaining the sluggish response of U.S. real GDP growth. Nor did we find evidence of financial contagion, of spillovers from oil-related investment to non-oil related investment, of an increase in household savings, or of households deleveraging.
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Suggested Citation

  • Christiane Baumeister & Lutz Kilian, 2016. "Lower Oil Prices and the U.S. Economy: Is This Time Different?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(2 (Fall)), pages 287-357.
  • Handle: RePEc:bin:bpeajo:v:47:y:2016:i:2016-02:p:287-357
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Martin Geiger & Johann Scharler, 2018. "How do consumers interpret the macroeconomic effects of oil price fluctuations? Evidence from U.S. survey data," Working Papers 2018-13, Faculty of Economics and Statistics, University of Innsbruck.
    2. Hilde C. Bjørnland & Julia Zhulanova, 2018. "The Shale Oil Boom and the U.S. Economy: Spillovers and Time-Varying Effects," Working Papers No 8/2018, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    3. repec:bla:ecinqu:v:56:y:2018:i:3:p:1827-1845 is not listed on IDEAS
    4. Christiane Baumeister & Lutz Kilian & Xiaoqing Zhou, 2017. "Is the Discretionary Income Effect of Oil Price Shocks a Hoax?," CESifo Working Paper Series 6369, CESifo Group Munich.
    5. repec:eee:jrpoli:v:61:y:2019:i:c:p:572-584 is not listed on IDEAS
    6. repec:eee:riibaf:v:47:y:2019:i:c:p:600-615 is not listed on IDEAS
    7. repec:eee:eneeco:v:72:y:2018:i:c:p:177-187 is not listed on IDEAS
    8. repec:eee:eneeco:v:78:y:2019:i:c:p:289-300 is not listed on IDEAS
    9. repec:eee:ecolet:v:159:y:2017:i:c:p:208-213 is not listed on IDEAS
    10. repec:eee:eneeco:v:80:y:2019:i:c:p:86-99 is not listed on IDEAS
    11. repec:eee:enepol:v:129:y:2019:i:c:p:89-99 is not listed on IDEAS
    12. repec:eee:enepol:v:116:y:2018:i:c:p:357-372 is not listed on IDEAS
    13. repec:eee:jimfin:v:74:y:2017:i:c:p:137-146 is not listed on IDEAS
    14. Abubakar El-Sidig A.A Mahdi, 2019. "Impact of Crude Oil Price Changes on Household Consumption Expenditure in Oman (1990 -2016)," GATR Journals jber175, Global Academy of Training and Research (GATR) Enterprise.
    15. Mohamad B. Karaki, 2018. "Asymmetries In The Responses Of Regional Job Flows To Oil Price Shocks," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1827-1845, July.
    16. Shahbaz, Muhammad & Ahmed, Khalid & Tiwari, Aviral Kumar & Jiao, Zhilun, 2019. "Resource Curse Hypothesis and Role of Oil Prices in USA," MPRA Paper 96633, University Library of Munich, Germany, revised 14 Oct 2019.

    More about this item

    Keywords

    oil prices; gasoline; GDP; financial contagion; oil-related investment; household savings; households deleveraging;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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