Working Paper

Time-varying oil price volatility and macroeconomic aggregates

Abstract: 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 nonlinear 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.

Keywords: time series analysis; Consumption (Economics); Capital investments; Natural resources; Energy consumption;

https://doi.org/10.24149/wp1201

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2012

Number: 1201