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Oil Prices and the Dynamics of Output and Real Exchange Rate

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Abstract

We examine the role of oil price shocks in effecting changes both at the aggregate and sectoral levels using an estimated dynamic stochastic equilibrium open economy model. Our main finding is that energy price shocks are not able directly to generate the magnitude of the economic downturn observed in the data. These shocks, however, do possess a strong indirect transmission link that endogenously spreads their effect through the system such that they account for a considerable portion of the U.S. business cycle movements. This leads us to conclude that previous results that attribute a minimal importance to oil price shocks must be focusing more on the energy cost share of gross domestic product and less on how they affect the intertemporal decisions of economic agents. We also find that external shocks have been responsible for explaining volatility in U.S. economic activities for a long time. This leads us to conclude that modelling the U.S. as a closed economy discounts a sizeable set of very relevant factors.

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  • Meenagh, David & Minford, Patrick & Oyekola, Olayinka, 2015. "Oil Prices and the Dynamics of Output and Real Exchange Rate," Cardiff Economics Working Papers E2015/18, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2015/18
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    Keywords

    Two sector; non-stationary DSGE model; Oil price; Relative prices; Domestic shocks; Imported shocks;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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