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Is Cheaper Oil Good News or Bad News for U.S. Economy?

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Abstract

Oil prices have declined substantially since the summer of 2014. If these price declines reflect demand shocks, then this would suggest a slowdown in global economic activity. Alternatively, if the declines are driven by supply shocks, then the drop in prices might indicate a forthcoming boost in spending as firms and households benefit from lower energy costs. In this post, we use correlations of oil price changes with a broad array of financial variables to confirm that this recent fall in oil prices has been mostly the result of increased global oil supply. We then use a model to assess how this supply shock will affect U.S. economic conditions in 2015.

Suggested Citation

  • Jan J. J. Groen & Patrick Russo, 2015. "Is Cheaper Oil Good News or Bad News for U.S. Economy?," Liberty Street Economics 20150608b, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87038
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    Cited by:

    1. Simona Delle Chiaie & Laurent Ferrara & Domenico Giannone, 2022. "Common factors of commodity prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(3), pages 461-476, April.

    More about this item

    Keywords

    Oil Prices; Oil Supply Shocks; Asset Prices; VAR models;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F00 - International Economics - - General - - - General
    • G1 - Financial Economics - - General Financial Markets

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