Oil supply shocks and the U.S. economy: An estimated DSGE model

We develop and use a medium-sized DSGE model of the U.S. economy to evaluate how U.S. real GDP responds to oil price movements that originate from global oil supply shocks. The core of the model is a standard macroeconomic DSGE framework that includes nominal and real frictions. The model includes oil as an input in multiple domestic sectors (consumption, intermediate goods, and transportation services). We include a domestic oil production sector for the United States to reflect the recent development in shale oil technology. The model also captures international trade in goods and oil. The model parameters are set through a combination of calibration and Bayesian estimation using quarterly data for 1991 through 2015. Baseline estimation of the model finds the elasticity of U.S. real GDP with respect to an oil price shock of − 0.015, which is among the less elastic estimates in the literature. Using the model to conduct counterfactual analysis, we find that decreasing steady state U.S. oil consumption substantially reduces the response of real GDP to oil prices. Increasing U.S. domestic oil production only modestly reduces the response of real GDP to oil prices.