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Oil shocks, monetary policy, and economic activity

Author

Listed:
  • Michael Dotsey
  • Max Reid

Abstract

Various reasons have been given to explain downturns in U.S. economic activity since World War II. Romer and Romer (1989) argued that these recessions were primarily associated with monetary contractions, while Hamilton (1983) and others attributed them to oil price increases. We investigate these competing hypotheses and find that when measures of oil prices are included, the Romers’ measure of monetary policy does not significantly explain economic downturns. However, alternative measures of monetary policy, specifically the federal funds rate the spread between the ten-year Treasury rate and the federal funds rate, are significantly linked to economic activity. We also find that Hamilton’s result that oil prices significantly influence real activity are robust to the inclusion of these alternative indicators of monetary policy.

Suggested Citation

  • Michael Dotsey & Max Reid, 1992. "Oil shocks, monetary policy, and economic activity," Economic Review, Federal Reserve Bank of Richmond, issue Jul, pages 14-27.
  • Handle: RePEc:fip:fedrer:y:1992:i:jul:p:14-27:n:v.78no.4
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    Citations

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    Cited by:

    1. Monica Dudian & Mihaela Mosora & Cosmin Mosora & Stefanija Birova, 2017. "Oil Price and Economic Resilience. Romania’s Case," Sustainability, MDPI, Open Access Journal, vol. 9(2), pages 1-8, February.
    2. Amano, R. A. & van Norden, S., 1998. "Oil prices and the rise and fall of the US real exchange rate," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 299-316, April.
    3. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    4. Cameron, Ken & Schnusenberg, Oliver, 2009. "Oil prices, SUVs, and Iraq: An investigation of automobile manufacturer oil price sensitivity," Energy Economics, Elsevier, vol. 31(3), pages 375-381, May.
    5. Finn, Mary G., 1995. "Variance properties of Solow's productivity residual and their cyclical implications," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1249-1281.
    6. Mark A. Hooker, "undated". "Exploring the Robustness of the Oil Price-Macroeconomy Relationship," Finance and Economics Discussion Series 1997-56, Board of Governors of the Federal Reserve System (U.S.).
    7. Sergey Drobyshevsky & A. Kozlovskaya & Pavel Trunin, . "Monetary and Credit Policy Options for an Oil Exporting Country," Research Paper Series, Gaidar Institute for Economic Policy.
    8. Apergis, Nicholas & Miller, Stephen, 2004. "Macroeconomic rationality and Lucas' misperceptions model: further evidence from 41 countries," Journal of Economics and Business, Elsevier, vol. 56(3), pages 227-241.
    9. Leeper, Eric M., 1997. "Narrative and VAR approaches to monetary policy: Common identification problems," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 641-657, December.
    10. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
    11. Min, Hong-Ghi & Lee, Duk-Hee & Nam, Changi & Park, Myeong-Cheol & Nam, Sang-Ho, 2003. "Determinants of emerging-market bond spreads: Cross-country evidence," Global Finance Journal, Elsevier, vol. 14(3), pages 271-286, December.

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