The relationship between oil prices and long-term interest rates

Christopher Phillip Reicher and Johannes Friederich Utlaut

No 1637, Kiel Working Papers from Kiel Institute for the World Economy

Abstract: We estimate a seven-variable-VAR for the U.S. economy on postwar data using long-run restrictions, taking changes in long-run interest rates and inflation expectations into account. We find a strong connection between oil prices and long-run nominal interest rates which has lasted throughout the entire postwar period. We find that a simple off-the-shelf theoretical model of oil prices and monetary policy, where oil prices are flexible and other prices are sticky, in fact predicts a strong relationship if inflation and oil prices were driven by monetary policy. The observed magnitude of this relationship is still a bit of a puzzle, but this finding does call into question the identification techniques commonly used to identify oil shocks.

Keywords: Oil shocks; interest rates; inflation (search for similar items in EconPapers)
JEL-codes: E31 E58 N50 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1637

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