The Evolving Impact of U.S. Monetary Policy on Real Oil Prices: A Time-Varying Granger and Local Projections Approach

This paper examines the dynamic relationship between real oil prices and U.S. monetary policy instruments over more than fifty years. Using symmetric and asymmetric time-varying Granger predictability tests alongside time-varying local projections with stochastic volatility, the study assesses how U.S. monetary aggregates and interest rates predict real oil prices—and how oil prices, in turn, predict monetary variables. The results show that both narrow and broad monetary aggregates, as well as short- and long-term interest rates, Granger predict real oil prices to varying degrees since the 1970s, with notable differences between symmetric and asymmetric specifications. Predictability is bidirectional, yet oil price responses vary substantially over time. Local projections show that interest rates shock real oil prices with high magnitude during early conventional times, especially the 1973 and 1979 oil shocks plus some in the 1980s, but diminish markedly thereafter. In contrast, monetary aggregate shocks dominate in magnitude after 2008, as unconventional monetary policy became manifest. Money supply shocks strongly influence oil prices during the global financial crisis, the 2015–2019 normalization period, the COVID-19 episode, and the 2021–2023 inflation surge. Findings highlight historical time-varying asymmetry in how monetary policy interacts with oil markets, providing implications for policy.