Journal Article

Oil shocks, monetary policy, and economic activity

Abstract: Various reasons have been given to explain downturns in U.S. economic activity since World War II. Romer and Romer (1989) argued that these recessions were primarily associated with monetary contractions, while Hamilton (1983) and others attributed them to oil price increases. We investigate these competing hypotheses and find that when measures of oil prices are included, the Romers measure of monetary policy does not significantly explain economic downturns. However, alternative measures of monetary policy, specifically the federal funds rate the spread between the ten-year Treasury rate and the federal funds rate, are significantly linked to economic activity. We also find that Hamiltons result that oil prices significantly influence real activity are robust to the inclusion of these alternative indicators of monetary policy.

Keywords: Petroleum industry and trade; Monetary policy; Economic conditions;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Economic Review

Publication Date: 1992

Volume: 78

Issue: Jul

Pages: 14-27