Oil shocks and the UK economy: the changing nature of shocks and impact over time

Stephen Millard and Tamarah Shakir ()
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Tamarah Shakir: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 476, Bank of England working papers from Bank of England

Abstract: In this paper we examine how the impact of oil price movements on the UK economy differs depending on the underlying source of the shock, that is, whether the oil price has been driven by a supply, or demand, disturbance. In addition we employ an empirical framework with time-varying parameters to allow us to see how the impact of oil price shocks may have developed over time. In line with earlier studies on larger economies, we find that the source of the shock does indeed affect the size and nature of the eventual impact on the UK economy. Oil supply shocks typically lead to larger negative impacts on output and slightly higher increases in inflation relative to oil shocks stemming from shocks to world demand, which typically have smaller and largely positive, impacts on UK output. We find evidence that the nature of shocks in the world oil market has changed over time, with the oil price becoming more sensitive to changes in oil production. There is also evidence that the impact of oil shocks became much smaller from the mid-1980s onwards, although the impact has risen slightly since around 2004.

Keywords: Oil price shocks; time-varying parameter VARs (search for similar items in EconPapers)
JEL-codes: Q43 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-08-16
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0476

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