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Welfare Costs of Oil Shocks

Author

Listed:
  • Amir Yaron

    (University of Pennsylvania)

  • Steffen Hitzemann

    (The Ohio State University)

Abstract

This paper investigates the costs of oil shocks for the economy's welfare. Using a VECM, we empirically show that domestic US oil production shocks only have a weak and temporary impact on macroeconomic variables, while the effect of global oil price shocks is persistent and economically and statistically significant. We rationalize these findings within a calibrated two-sector model in which oil is an input factor for industrial production and also part of the household's consumption bundle. Based on the model, we show that oil shocks are associated with large welfare costs for oil-importing economies. Our framework enables several experiments regarding the welfare implications of a reduced oil share in production and consumption, the strategic petroleum reserve, and technological innovations such as fracking.

Suggested Citation

  • Amir Yaron & Steffen Hitzemann, 2017. "Welfare Costs of Oil Shocks," 2017 Meeting Papers 1381, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1381
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    Cited by:

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