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Time-Varying Oil Price Volatility and Macroeconomic Aggregates

  • Michael Plante

    ()

    (Federal Reserve Bank of Dallas)

  • Nora Traum

    ()

    (North Carolina State University)

We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986-2011 and utilize the estimated process in a non-linear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead in- vestment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result.

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File URL: http://www.iub.edu/~caepr/RePEc/PDF/2012/CAEPR2012-002.pdf
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Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2012-002.

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Length: 39 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:inu:caeprp:2012-002
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