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Oil shocks and the U.S. economy in a data-rich model

Kuhelika De, Ryan Compton and Daniel Giedeman

Economic Modelling, 2022, vol. 108, issue C

Abstract: Are all oil price shocks the same? We investigate the effects of three types of global crude oil price shocks using a factor augmented VAR framework and 185 monthly macroeconomic indicators from 1978 to 2017. Our results indicate that while both demand and supply driven oil price shocks lead to a significant increase in the global crude oil price and high degree of pass-through to US consumer and producer prices, oil specific precautionary demand shocks are the main drivers of fluctuations in the price of crude oil and the US price level, followed by global economic activity oil demand shocks. Further, while increases in the price of oil triggered by oil supply shocks lower US economic activity, those triggered by global economic activity oil demand shocks are associated with increased US economic activity. Our results suggest the need for monetary policy to stabilize the pass-through from global crude oil prices to domestic inflation.

Keywords: Oil demand shocks; Oil supply shocks; Oil price; Monetary policy; Exchange rate; Factor model; FAVAR (search for similar items in EconPapers)
JEL-codes: C32 E31 E44 E52 F41 Q4 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.econmod.2022.105755

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