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Lower Oil Prices and the U.S. Economy: Is this Time Different?

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  • Christiane Baumeister
  • Lutz Kilian

Abstract

We explore the effect on U.S. real GDP growth of the sharp and sustained decline in the global price of crude oil and hence in the U.S. price of gasoline after June 2014. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percentage points of real GDP growth by raising private real consumption and non-oil related business investment and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. This stimulating effect, however, has been largely offset by a large reduction in real investment by the oil sector. Hence, the net stimulus since June 2014 has been close to zero. We show that the response of the U.S. economy was not fundamentally different from that observed after the oil price decline of 1986. Then as now the response of the U.S. economy is consistent with standard economic models of the transmission of oil price shocks. We found no evidence of an additional role for frictions in reallocating labor across sectors or for increased uncertainty about the price of gasoline in explaining the sluggish response of U.S. real GDP growth. Nor did we find evidence of financial contagion, of spillovers from oil-related investment to non-oil related investment, of an increase in household savings, or of households deleveraging.

Suggested Citation

  • Christiane Baumeister & Lutz Kilian, 2017. "Lower Oil Prices and the U.S. Economy: Is this Time Different?," CESifo Working Paper Series 6322, CESifo.
  • Handle: RePEc:ces:ceswps:_6322
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    References listed on IDEAS

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    Cited by:

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    2. Mohamad B. Karaki, 2018. "Asymmetries In The Responses Of Regional Job Flows To Oil Price Shocks," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1827-1845, July.
    3. Jochen H. F. Güntner & Katharina Linsbauer, 2018. "The Effects of Oil Supply and Demand Shocks on U.S. Consumer Sentiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1617-1644, October.
    4. Nguyen, Bao H. & Okimoto, Tatsuyoshi, 2019. "Asymmetric reactions of the US natural gas market and economic activity," Energy Economics, Elsevier, vol. 80(C), pages 86-99.
    5. Enders, Almira & Enders, Zeno, 2017. "Second-round effects after oil-price shocks: Evidence for the euro area and Germany," Economics Letters, Elsevier, vol. 159(C), pages 208-213.
    6. Lambertides, Neophytos & Savva, Christos S. & Tsouknidis, Dimitris A., 2017. "The effects of oil price shocks on U.S. stock order flow imbalances and stock returns," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 137-146.
    7. Lu, Quanying & Li, Yuze & Chai, Jian & Wang, Shouyang, 2020. "Crude oil price analysis and forecasting: A perspective of “new triangle”," Energy Economics, Elsevier, vol. 87(C).

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    More about this item

    Keywords

    stimulus; oil price decline; uncertainty; reallocation; savings; shale oil; oil loans;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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