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Time-Varying Effects of Oil Supply Shocks on the US Economy

  • C. BAUMEISTER

    ()

  • G. PEERSMAN

    ()

Using a Time-Varying Parameters Bayesian Vector Autoregression model, we investigate how the dynamic effects of oil supply shocks on the US economy have changed over time. In contrast to previous studies, we identify oil supply shocks with sign restrictions which are derived from a simple supply and demand model of the global oil market. First, we find a remarkable structural change in the oil market itself, i.e. a typical oil supply shock is characterized by a much smaller impact on world oil production and a greater effect on the real price of crude oil over time. A steepening of the oil demand curve is the only possible explanation for this stylized fact. Accordingly, similar physical disturbances in oil production now have a significantly higher leverage effect on oil prices resulting in a stronger impact on real GDP and consumer prices. Second, we document that the contribution of oil supply shocks to fluctuations in the real price of oil has decreased considerably over time, implying that current oil price fluctuations are more demand driven. Third, oil supply disturbances seem to have played a significant but non-exclusive role in the 1974/75 and early 1990s recessions but were of minor importance in the 1980/81 and millennium slowdowns. Finally, while oil supply shocks explain little of the "Great Inflation", their relative importance for CPI inflation variability has somewhat increased over time.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 08/515.

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Length: 51 pages
Date of creation: Apr 2008
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Handle: RePEc:rug:rugwps:08/515
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