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To consume or not: How oil prices affect the comovement of consumption and aggregate wealth

  • Odusami, Babatunde Olatunji
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    This paper provides insight into how oil price movements affect the consumption choices of U.S. households through the wealth channel. Lettau and Ludvigson (2001) show that while consumption, asset wealth, and labor income share a common long-term trend; they substantially deviate from one another in the short run. In this paper, I show that these transitory deviations can be explained by fluctuations in the price of crude oil. Linear and threshold multivariate autoregressive models are used to measure the oil price effect. Oil price effect on the consumption to aggregate wealth ratio is robust to monetary policy effect, sub-period effect, and econometric specifications of oil price effect. Generally speaking, higher (lower) oil price will lead to a decrease (increase) in the proportion of aggregate wealth consumed. In addition, the magnitude of the oil price effect is asymmetric and sub-period dependent. Oil price effect was higher before the 1980's than in succeeding periods.

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    File URL: http://www.sciencedirect.com/science/article/B6V7G-4XVK408-1/2/fb20c10b773197ddc7c6fd4f882a06f4
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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 32 (2010)
    Issue (Month): 4 (July)
    Pages: 857-867

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    Handle: RePEc:eee:eneeco:v:32:y:2010:i:4:p:857-867
    Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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    1. 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.
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    9. Li, C W & Li, W K, 1996. "On a Double-Threshold Autoregressive Heteroscedastic Time Series Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 253-74, May-June.
    10. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
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    12. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
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    21. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    22. Sydney Ludvigson & Charles Steindel & Martin Lettau, 2002. "Monetary policy transmission through the consumption-wealth channel," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 117-133.
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