Is the Discretionary Income Effect of Oil Price Shocks a Hoax?

Christiane Baumeister, Lutz Kilian and Xiaoqing Zhou

The Energy Journal, 2018, vol. 39, issue 2_suppl, 117-137

Abstract: The transmission of oil price shocks has been a question of central interest in macroeconomics since the 1970s. There has been renewed interest in this question since the large and persistent fall in the real price of oil in 2014-16. In the context of this debate, Ramey (2017) makes the striking claim that the existing literature on the transmission of oil price shocks is fundamentally confused about the question of how to quantify the effect of oil price shocks. In particular, she asserts that the discretionary income effect on private consumption, which plays a central role in contemporary accounts of the transmission of oil price shocks to the U.S. economy, makes no economic sense and has no economic foundation. Ramey suggests that the literature has too often confused the terms-of-trade effect with this discretionary income effect, and she makes the case that the effects of the oil price decline of 2014-16 on private consumption are smaller for a multitude of reasons than suggested by empirical models of the discretionary income effect. We review the main arguments in Ramey (2017) and show that none of her claims hold up to scrutiny. Our analysis highlights the theoretical basis of the discretionary income effect. We also discuss improved regression-based estimates of this effect that allow for changes in the dependence on oil and gasoline imports, and we highlight the fact that alternative estimates used by policymakers involve strong simplifying assumptions.

Keywords: Stimulus; oil price decline; discretionary income effect; expenditure; share; gasoline; net oil imports. (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://journals.sagepub.com/doi/10.5547/01956574.39.SI2.cbau (text/html)

Related works:
Working Paper: Is the Discretionary Income Effect of Oil Price Shocks a Hoax? (2017)
Working Paper: Is the Discretionary Income Effect of Oil Price Shocks a Hoax? (2017)
Working Paper: Is the Discretionary Income Effect of Oil Price Shocks a Hoax? (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:enejou:v:39:y:2018:i:2_suppl:p:117-137

DOI: 10.5547/01956574.39.SI2.cbau

Access Statistics for this article

More articles in The Energy Journal
Bibliographic data for series maintained by SAGE Publications ().