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Working Paper
Oil Price Shocks and Inflation
Despite growing interest in the impact of oil and other energy price shocks on inflation and inflation expectations, until recently this question has not received much attention. This survey not only presents empirical results for the U.S. economy, but expands the analysis to include other major economies. We find that only in the euro area and in the U.K. energy price shocks are associated with a material increase in core consumer prices. This helps explain the somewhat more persistent response of headline inflation in these countries than in the U.S. or Canada. Inflation is even less ...
Working Paper
Industry Effects of Oil Price Shocks: Re-Examination
Sectoral responses to oil price shocks help determine how these shocks are transmitted through the economy. Textbook treatments of oil price shocks often emphasize negative supply effects on oil importing countries. By contrast, the seminal contribution of Lee and Ni (2002) has shown that almost all U.S. industries experience oil price shocks largely through a reduction in their respective demands. Only industries with very high oil intensities face a supply-driven reduction. In this paper, we re-examine this seminal findings using two additional decades of data. Further, we apply updated ...
Working Paper
A Broader Perspective on the Inflationary Effects of Energy Price Shocks
Consumers purchase energy in many forms. Sometimes energy goods are consumed directly, for instance, in the form of gasoline used to operate a vehicle, electricity to light a home or natural gas to heat a home. At other times, the cost of energy is embodied in the prices of goods and services that consumers buy, say when purchasing an airline ticket or when buying online garden furniture made from plastic to be delivered by mail. Previous research has focused on quantifying the pass-through of the price of crude oil or the price of motor gasoline to U.S. inflation. Neither approach accounts ...
Working Paper
Understanding the Estimation of Oil Demand and Oil Supply Elasticities
This paper examines the advantages and drawbacks of alternative methods of estimating oil supply and oil demand elasticities and of incorporating this information into structural VAR models. I not only summarize the state of the literature, but also draw attention to a number of econometric problems that have been overlooked in this literature. Once these problems are recognized, seemingly conflicting conclusions in the recent literature can be resolved. My analysis reaffirms the conclusion that the one-month oil supply elasticity is close to zero, which implies that oil demand shocks are the ...
Working Paper
The Role of the Prior in Estimating VAR Models with Sign Restrictions
Several recent studies have expressed concern that the Haar prior typically imposed in estimating sign-identified VAR models may be unintentionally informative about the implied prior for the structural impulse responses. This question is indeed important, but we show that the tools that have been used in the literature to illustrate this potential problem are invalid. Specifically, we show that it does not make sense from a Bayesian point of view to characterize the impulse response prior based on the distribution of the impulse responses conditional on the maximum likelihood estimator of ...
Working Paper
The U.S. Shale Oil Boom, the Oil Export Ban, and the Economy: A General Equilibrium Analysis Nida
This paper examines the e ects of the U.S. shale oil boom in a two-country DSGE model where countries produce crude oil, re ned oil products, and a non-oil good. The model in- {{p}} corporates di erent types of crude oil that are imperfect substitutes for each other as inputs into the re ning sector. The model is calibrated to match oil market and macroeconomic data for the U.S. and the rest of the world (ROW). {{p}} We investigate the implications of a signicant {{p}} increase in U.S. light crude oil production similar to the shale oil boom. Consistent with the data, our model predicts that ...
Working Paper
Oil Prices, Gasoline Prices and Inflation Expectations: A New Model and New Facts
The conventional wisdom that inflation expectations respond to the level of the price of oil (or the price of gasoline) is based on testing the null hypothesis of a zero slope coefficient in a static single-equation regression model fit to aggregate data. Given that the regressor in this model is not stationary, the null distribution of the t-test statistic is nonstandard, invalidating the use of the normal approximation. Once the critical values are adjusted, these regressions provide no support for the conventional wisdom. Using a new structural vector regression model, however, we ...
Working Paper
The Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020-23
Predictions of oil prices reaching $100 per barrel during the winter of 2021/22 have raised fears of persistently high inflation and rising inflation expectations for years to come. We show that these concerns have been overstated. A $100 oil scenario of the type discussed by many observers, would only briefly raise monthly headline inflation, before fading rather quickly. However, the short-run effects on headline inflation would be sizable. For example, on a year-over-year basis, headline PCE inflation would increase by 1.8 percentage points at the end of 2021 under this scenario, but only ...
Working Paper
Non-renewable resources, extraction technology, and endogenous growth
We document that global resource extraction has strongly increased with economic growth, while prices have exhibited stable trends for almost all major non-renewable resources from 1700 to 2018. Why have resources not become scarcer as suggested by standard economic theory? We develop a theory of extraction technology, geology and growth grounded in stylized facts. Rising resource demand incentivises firms to invest in new technology to increase their economically extractable reserves. Prices remain constant because increasing returns from the geological distribution of resources offset ...
Working Paper
Oil Prices, Exchange Rates and Interest Rates
There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn ...