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How do oil shocks transmit through the US economy? Evidence from a large BVAR model with stochastic volatility

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  • Renée Fry-McKibbin
  • Beili Zhu

Abstract

This paper employs a large BVAR model with common stochastic volatility to examine the effects of oil supply shocks, global oil demand shocks and precautionary oil shocks on 17 U.S. macroeconomic and financial market variables from 1986Q1 to 2019Q2. Generalized impulse response functions calculated using stochastic volatility provide a time-varying account of the impacts of the shocks occurring in each quarter. We also compute standard impulse response functions for shocks of the sizes evident in 2019Q2 and 2008Q4. The magnitudes of the generalized impulse response functions vary over time, but the fluctuations are not particularly different except during the global financial crisis. All oil shocks have permanent inflationary effects; there is evidence of long-run adverse effects on several macroeconomic variables because of global oil demand shocks despite rising GDP, and all oil shocks negatively affect the U.S. stock and currency markets in the long term, but the effects on the bond market differ.

Suggested Citation

  • Renée Fry-McKibbin & Beili Zhu, 2021. "How do oil shocks transmit through the US economy? Evidence from a large BVAR model with stochastic volatility," CAMA Working Papers 2021-13, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2021-13
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-01/13_2021_fry-mckibbin_zhu.pdf
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    Cited by:

    1. Xin Sheng & Rangan Gupta & Qiang Ji, 2023. "The Effects of Disaggregate Oil Shocks on the Aggregate Expected Skewness of the United States," Risks, MDPI, vol. 11(11), pages 1-9, October.

    More about this item

    Keywords

    Generalised impulse responses; Sign restrictions;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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