Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996

Abstract

This paper reports on developments in theoretical and empirical understanding of the macroeconomic consequences of oil price shocks since 1996, when the U.S. Department of Energy sponsored a workshop summarizing the state of understanding of the subject. Four major insights stand out. First, theoretical and empirical analyses point to intra- and intersectoral reallocations in response to shocks, generating asymmetric impacts for oil price increases and decreases. Second, the division of responsibility for post-oil-price shock recessions between monetary policy and oil price shocks, has leaned heavily toward oil price shocks. Third, parametric statistical techniques have identified a stable, nonlinear, relationship between oil price shocks and GDP from the late 1940s through the third quarter of 2001. Fourth, the magnitude of effect of an oil price shock on GDP, derived from impulse response functions of oil price shocks in the GDP equation of a VAR, is around -0.05 and -0.06 as an elasticity, spread over two years, where the shock threshold is a price change exceeding a three-year high.

Effects of Oil Price Shocks on German Business Cycles

“…However, the ongoing discussion shows that the causes of these reduced real effects of energy price shocks are far from clear (for a recent overview of this discussion see Jones et al 2004;Barsky, Kilian 2004). Some authors argue that the experiences of the seventies and eighties overstate the pure effects of oil price shocks.…”

The resilience of the Indian economy to rising oil prices as a validation test for a global energy–environment–economy CGE model

“…Our interest in this paper is focused on how largescale models can draw on this complexity and represent the response to an oil price shock, which appears particularly difficult. On the one hand, Jones et al (2004) assert that macromodels (IMF's MULTIMOD, OECD's INTERLINK, FRB's FRB/Global) are structurally unable to reproduce the magnitude of the economic response to oil price shock, as they resort to single-sector production functions and therefore do not capture the intersectoral resource (labor, capital, materials) reallocation costs. On the other hand, E3 CGE models represent 1 See for example Jones and Leiby (1996) and Jones et al (2004) for a detailed review of the literature.…”

Regime switching model of US crude oil and stock market prices: 1859 to 2013

“…Market participants want a framework that identifies how oil-price changes affect stock prices or stock market returns. On theoretical grounds, oil-price shocks affect stock market returns or prices through their effect on expected earnings (Jones et al, 2004). The relevant literature includes the following studies.…”