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The relationship between oil prices and long-term interest rates

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  • Reicher, Christopher Phillip
  • Utlaut, Johannes Friederich

Abstract

We estimate a seven-variable-VAR for the U.S. economy on postwar data using long-run restrictions, taking changes in long-run interest rates and inflation expectations into account. We find a strong connection between oil prices and long-run nominal interest rates which has lasted throughout the entire postwar period. We find that a simple off-the-shelf theoretical model of oil prices and monetary policy, where oil prices are flexible and other prices are sticky, in fact predicts a strong relationship if inflation and oil prices were driven by monetary policy. The observed magnitude of this relationship is still a bit of a puzzle, but this finding does call into question the identification techniques commonly used to identify oil shocks.

Suggested Citation

  • Reicher, Christopher Phillip & Utlaut, Johannes Friederich, 2010. "The relationship between oil prices and long-term interest rates," Kiel Working Papers 1637, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1637
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    References listed on IDEAS

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    Cited by:

    1. Mensi, Walid & Rehman, Mobeen Ur & Al-Yahyaee, Khamis Hamed, 2020. "Time-frequency co-movements between oil prices and interest rates: Evidence from a wavelet-based approach," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    2. Arora, Vipin & Tanner, Matthew, 2013. "Do oil prices respond to real interest rates?," Energy Economics, Elsevier, vol. 36(C), pages 546-555.
    3. Kashif Zaheer Malik & Haram Ajmal & Muhammad Umer Zahid, 2017. "Oil Price Shock and its Impact on the Macroeconomic Variables of Pakistan: A Structural Vector Autoregressive Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 7(5), pages 83-92.
    4. Syafrida Hani & Elizar Sinambela, 2021. "Indonesia s Bank Response of Interest Rates to the Prices of World Crude Oil and Foreign Rates of Interest," International Journal of Energy Economics and Policy, Econjournals, vol. 11(1), pages 558-564.

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    More about this item

    Keywords

    Oil shocks; interest rates; inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N50 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - General, International, or Comparative

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