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Causes and Consequences of Oil Price Shocks on the UK Economy

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  • Marco Lorusso

    (Centre for Energy Economics Research and Policy, Heriot-Watt University)

  • Luca Pieroni

    (Department of Political Science, University of Perugia)

Abstract

In this paper, we assess the impact of oil price fluctuations on the UK economy. We use an empirical strategy which allows us to decompose oil price changes from the underlying source of the shock. Our results show that, since the mid-1970s, oil price movements have been mainly associated with shocks to oil demand rather than oil supply. We also find that the consequences of oil price changes on UK macroeconomic aggregates depend on the different types of oil shocks. While increases in global real economic activity do not depress the UK economy in the short run, shortfalls in crude oil supply cause an immediate fall in GDP growth. In addition, since monetary policy depends on the nature of the shock hitting the oil market, domestic inflation increases following a rise in the real oil price. Finally, our results also show that in response to oil price increases, the government deficit decreases.

Suggested Citation

  • Marco Lorusso & Luca Pieroni, 2015. "Causes and Consequences of Oil Price Shocks on the UK Economy," CEERP Working Paper Series 002, Centre for Energy Economics Research and Policy, Heriot-Watt University, revised Nov 2015.
  • Handle: RePEc:hwc:wpaper:002
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    More about this item

    Keywords

    Oil Price Shocks; Vector Autoregressions;

    JEL classification:

    • 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
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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