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Oil shocks, monetary policy, and economic activity

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  • 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 Hamiltons 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, vol. 78(Jul), pages 14-27.
    • Handle: RePEc:fip:fedrer:y:1992:i:jul:p:14-27:n:v.78no.4
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    References listed on IDEAS

    as
    1. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
    2. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184, National Bureau of Economic Research, Inc.
    3. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-744, June.
    4. Mary G. Finn, 1991. "Energy price shocks, capacity utilization and business cycle fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 50, Federal Reserve Bank of Minneapolis.
    5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    6. Tatom, John A., 1988. "Are the macroeconomic effects of oil-price changes symmetric?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 325-368, January.
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