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Working Paper
How Times Have Changed: The Impact of the 2026 Iran War on the U.S. Economy
The 2026 Iran war has raised the question of how exposed the U.S. economy is to geopolitical oil supply disruptions. It is widely believed that the U.S. economy has become less vulnerable to such disruptions as it has reduced its dependence on oil and changed from a major net oil importer to a net oil exporter. We develop a two-country model of the global economy with large geopolitical oil supply disruptions that distinguishes between the U.S. economy and the rest of the world. We find that the response of U.S. real GDP growth to the disruption in global oil supplies today is only ...
Working Paper
Time-varying oil price volatility and macroeconomic aggregates
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 ...
Journal Article
Did speculation drive oil prices? market fundamentals suggest otherwise
Oil market speculation became an especially popular topic when the price of crude tripled over 18 months to a record high $145 per barrel in July 2008. Of particular interest to many is whether speculators drove oil prices beyond what fundamentals would have otherwise justified. We explore this issue over two Economic Letters. In this article, we look at evidence from the physical market for oil and conclude that fundamentals, and not speculation, were behind the dramatic rise and fall in oil prices. In our companion Economic Letter, we examine the futures market.
How Falling Oil Prices in Early 2020 Weakened the U.S. Economy
The benchmark West Texas Intermediate (WTI) price of oil dropped by more than half from Jan. 21 to April 3. This oil price decline has weakened rather than strengthened the U.S. economy, making this event different from past episodes of falling oil prices.
Working Paper
Complementarity and Macroeconomic Uncertainty
Macroeconomic uncertainty—the conditional volatility of the unforecastable component of a future value of a time series—shows considerable variation in the data. A typical assumption in business cycle models is that production is Cobb-Douglas. Under that assumption, this paper shows there is usually little, if any, endogenous variation in output uncertainty, and first moment shocks have similar effects in all states of the economy. When the model departs from Cobb-Douglas production and assumes capital and labor are gross complements, first-moment shocks have state-dependent effects and ...
Automakers' Bold Plans for Electric Vehicles Spur Battery Boom
Meeting ambitious manufacturing goals will require batteries—lots of them—as an electric vehicle (EV) can use hundreds to thousands of individual lithium-ion batteries.
Journal Article
Plunging oil prices: a boost for the U.S. economy, a jolt for Texas
Economic activity in the U.S. overall will benefit from the oil price collapse. The decline will, however, negatively affect oil-producing states such as Texas and North Dakota.
Working Paper
How should monetary policy respond to changes in the relative price of oil? considering supply and demand shocks
This paper examines optimal monetary policy in a New Keynesian model, where the relative price of oil is affected by exogenous supply shocks and a productivity-driven demand shock. When wages are flexible, stabilizing core inflation is optimal and the nominal rate rises (falls) in response to a demand (supply) shock. When both prices and wages are sticky, core inflation falls (rises) in response to the demand (supply) shock. Stabilizing CPI inflation generates small welfare losses only if the demand shock is the main driver of oil prices. Based on a VAR estimated using post-1986 data for the ...
Solar Lights Up Outlook for Renewable Energy in Texas
Improving economics and government tax incentives have spurred investment in utility-scale solar facilities in Texas.
Working Paper
The long–run macroeconomic impacts of fuel subsidies
Many developing and emerging market countries have subsidies on fuel products. Using a small open economy model with a non-traded sector I show how these subsidies impact the steady state levels of macroeconomic aggregates such as consumption, labor supply, and aggregate welfare. These subsidies can lead to crowding out of non-oil consumption, inefficient inter-sectoral allocations of labor, and other distortions in macroeconomic variables. Across steady states aggregate welfare is reduced by these subsidies. This result holds for a country with no oil production and for a net exporter of ...