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Oil Price Dynamics in a Real Business Cycle Model

  • Vipin Arora


  • Pedro Gomis-Porqueras


We show the importance of endogenous oil prices and production in the real business cycle framework. Endogenising these variables improves the model’s predictions of business cycle statistics, oil related and non-oil related, relative to a situation where either is exogenous. This result is robust to the standard extensions (variable capacity utilisation and monopolistic competition) used in the literature. In particular, we first show that with either exogenous oil prices or production the standard real business cycle model and variants cannot match the oil-related and business cycle facts. In contrast, when both of these variables are endogenous, we can substantially improve the corresponding co-movements and slightly improve standard business cycle properties for consumption and investment.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2011-17.

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Length: 18 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:een:camaaa:2011-17
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