Asset Value, Interest Rates and Oil Price Volatility
Simulations from a standard two-region model where producers respond to changes in interest rates are better able to match observed data than an identical model without supply-side responses. This indicates that incorporating the supply-side behaviour of oil producers is quantitatively important when endogenously modeling oil prices. These results have two implications. First, adding supply-side responses can change the oil price/output relationship, which is a continuing topic of research interest. Second, if production is unable to adjust to interest rate changes, an important explanatory factor of oil price volatility may be missing.
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