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Time-Varying Oil Price Volatility and Macroeconomic Aggregates

Listed author(s):
  • Nora Traum

    (North Carolina State University)

  • Michael Plante

    (Research Department)

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 investment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_455.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 455.

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Date of creation: 2012
Handle: RePEc:red:sed012:455
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Ryan Kellogg, 2010. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," NBER Working Papers 16541, National Bureau of Economic Research, Inc.
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  13. Jesús Fernández-Villaverde & Pablo Guerrón-Quintana & Keith Kuester & Juan Rubio-Ramírez, 2015. "Fiscal Volatility Shocks and Economic Activity," American Economic Review, American Economic Association, vol. 105(11), pages 3352-3384, November.
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  18. Arnberg, Soren & Bjorner, Thomas Bue, 2007. "Substitution between energy, capital and labour within industrial companies: A micro panel data analysis," Resource and Energy Economics, Elsevier, vol. 29(2), pages 122-136, May.
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