Working Paper Revision

Geopolitical Oil Price Risk and Economic Fluctuations

Abstract: This paper studies the general equilibrium effects of time-varying geopolitical risk in the oil market by simultaneously modeling downside risk from disasters, oil storage and the endogenous determination of oil price and macroeconomic uncertainty in the global economy. Notwithstanding the attention geopolitical events in oil markets have attracted, we find that geopolitical oil price risk is not a major driver of global macroeconomic fluctuations. Even when allowing for the possibility of an unprecedented 20 percent drop in global oil production, it takes a large increase in the probability of such a disaster to cause a sizable recessionary impact.

Keywords: geopolitical risk; macroeconomic risk; time-varying uncertainty; rare disasters; oil; endogeneity; shock propagation; economic fluctuations; precautionary savings; inventories;

JEL Classification: E13; E22; E32; Q43;

https://doi.org/10.24149/wp2403r1

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2024-11-12

Number: 2403

Related Works

• Working Paper Revision (2024-11-12) : You are here.
• Working Paper Original (2024-05-28) : Geopolitical Oil Price Risk and Economic Fluctuations