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Declining Effects of Oil-Price Shocks

Output responses to oil-price shocks not only tend to be weaker, but also to peak earlier recently. This paper builds a model that incorporates a realistic structure of US petroleum consumption and explores three possible explanations for the changes. The first is based on deregulation in the transportation sector, which has brought more competition and improved efficiency in the industry. The second is overall improve- ments in use of energy. The third is less persistence of the oil-price shock. Under realistic parameter values, it is demonstrated that all three factors play an important role quantitatively. These three factors together could account for a 51% reduction in the peak response of output to an oil-price shock.

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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2009-02.

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Handle: RePEc:lsu:lsuwpp:2009-02
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