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Oil shocks and the UK economy: the changing nature of shocks and impact over time

  • Millard, Stephen

    ()

    (Bank of England)

  • Shakir, Tamarah

    ()

    (Bank of England)

In this paper we examine how the impact of oil price movements on the UK economy differs depending on the underlying source of the shock, that is, whether the oil price has been driven by a supply, or demand, disturbance. In addition we employ an empirical framework with time-varying parameters to allow us to see how the impact of oil price shocks may have developed over time. In line with earlier studies on larger economies, we find that the source of the shock does indeed affect the size and nature of the eventual impact on the UK economy. Oil supply shocks typically lead to larger negative impacts on output and slightly higher increases in inflation relative to oil shocks stemming from shocks to world demand, which typically have smaller and largely positive, impacts on UK output. We find evidence that the nature of shocks in the world oil market has changed over time, with the oil price becoming more sensitive to changes in oil production. There is also evidence that the impact of oil shocks became much smaller from the mid-1980s onwards, although the impact has risen slightly since around 2004.

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Paper provided by Bank of England in its series Bank of England working papers with number 476.

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Length: 30 pages
Date of creation: 16 Aug 2013
Date of revision:
Handle: RePEc:boe:boeewp:0476
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  1. Gert Peersman & Ine Van Robays, 2009. "Oil and the Euro area economy," Economic Policy, CEPR;CES;MSH, vol. 24, pages 603-651, October.
  2. C. Baumeister & G. Peersman & I. Van Robays & -, 2009. "The Economic Consequences of Oil Shocks: Differences Across Countries and Time," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/630, Ghent University, Faculty of Economics and Business Administration.
  3. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
  4. Peersman, Gert & Van Robays, Ine, 2012. "Cross-country differences in the effects of oil shocks," Energy Economics, Elsevier, vol. 34(5), pages 1532-1547.
  5. Christiane Baumeister & Gert Peersman, 2012. "Time-Varying Effects of Oil Supply Shocks on the U.S. Economy," Working Papers 12-2, Bank of Canada.
  6. Harrison, Richard & Thomas, Ryland & de Weymarn, Iain, 2011. "The impact of permanent energy price shocks on the UK economy," Bank of England working papers 433, Bank of England.
  7. James D. Hamilton, 2009. "Causes and Consequences of the Oil Shock of 2007-08," NBER Working Papers 15002, National Bureau of Economic Research, Inc.
  8. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  9. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
  10. Renee Fry & Callum Jones & Christopher Kent, 2010. "Inflation in an Era of Relative Pirce Shocks," CAMA Working Papers 2010-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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